China’s banking reform: An assessment of its evolution and possible impact
The Chinese banking system, characterized by massive government intervention, poor asset quality and low capitalization, has started a reform process based on three main pillars: (i) bank restructuring, through the cleaning-up of non-performing loans and public capital injections, particularly in the four largest state-owned banks; (ii) financial liberalization, with the gradual flexibilization of quantity and price controls, the opening-up to foreign competition and cautious steps toward capital account liberalization; and (iii) strengthened financial regulation and supervision, coupled with efforts to improve corporate governance and transparency. Although the reform is still ongoing, our preliminary assessment indicates that changes are needed for the reform to be fully successful. Asset quality has improved, particularly in the recapitalized banks, but there is a high risk of a new build-up of non performing loans. Capitalization has increased in the largest banks, as a consequence of the government capital injections, but it generally remains low and profitability has fallen even further. China’s huge financing needs, to maintain high economic growth, and its commitment to fully open up its banking system to foreign competition urgently require a more comprehensive and time-bound strategy, with a long-term vision of the desired structure of the Chinese banking system. Bank recapitalization should be completed immediately, not only to ensure bank soundness, but also to increase profitability, which could be affected negatively as competition increases with full financial liberalization. Bank recapitalization, however, needs to be accompanied by a radical improvement in corporate governance, which would clearly be facilitated by a change in the property structure.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Enrica Detragiache & Asli DemirgÃ¼Ã§-Kunt, 1998.
"Financial Liberalization and Financial Fragility,"
IMF Working Papers
98/83, International Monetary Fund.
- Eswar Prasad & Qing Wang & Thomas Rumbaugh, 2005. "Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China," IMF Policy Discussion Papers 05/1, International Monetary Fund.
- Alicia Garcia Herrero & Daniel Santabarbara Garcia, 2004. "Where Is The Chinese Banking System Going With The Ongoing Reform?," Macroeconomics 0408001, EconWPA.
- Guonan Ma & Ben S.C. Fung, 2002. "China's asset management corporations," BIS Working Papers 115, Bank for International Settlements.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0508010. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.