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China’s banking reform: An assessment of its evolution and possible impact

  • Alicia Garcia-Herrero

    (Bank of Spain)

  • Sergio Gavila

    (Bank of Spain)

  • Daniel Santabarbara

    (Bank of Spain)

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.

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File URL: http://econwpa.repec.org/eps/fin/papers/0508/0508010.pdf
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Paper provided by EconWPA in its series Finance with number 0508010.

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Length: 52 pages
Date of creation: 22 Aug 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0508010
Note: Type of Document - pdf; pages: 52
Contact details of provider: Web page: http://econwpa.repec.org

References listed on IDEAS
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  1. Enrica Detragiache & Asli Demirgüç-Kunt, 1998. "Financial Liberalization and Financial Fragility," IMF Working Papers 98/83, International Monetary Fund.
  2. 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.
  3. Alicia Garcia Herrero & Daniel Santabarbara Garcia, 2004. "Where Is The Chinese Banking System Going With The Ongoing Reform?," Macroeconomics 0408001, EconWPA.
  4. Guonan Ma & Ben S.C. Fung, 2002. "China's asset management corporations," BIS Working Papers 115, Bank for International Settlements.
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