Banking Reform in China

Abstract

China’s banking reform has achieved significant progress in the past decade; however, problems and challenges remain. Our chapter argues that the inefficiency in the banking industry is mainly due to the system problem, and separate financial sector regulation restricts further banking development. Accession to the World Trade Organization (WTO) will accelerate the speed of China’s banking reform, even though with pain and at a price, and in turn, China will benefit from further integration into the world economy. The past decades witnessed successful economic reform in China, with GDP growth at an average rate of almost 8%; per capita GDP from US$266 at the end of 1979 to US$1,081 at the end of 2003 increased more than four times (Table 3.1). Successful accession to WTO on 11 December, 2001, accelerating the pace of economic reform and opening up speed to the world, meanwhile led China’s integration even more into the global economy, and “its share in world trade is now over 4 percent, compared with near zero in 1978” (Rodlauer and Heytnes, 2003, in ‘Introduction and Overview’). Now, China has become the major driving force in the development of global economy and plays an important role. “China’s historical record on globalization is very poor. China has almost always been either a strong opponent to this historical process when it was strong enough, or a reluctant follower when it was too weak to voice its opposition. However, given the size of China’s population and its dynamic economy over the last 20 years, the integration of China into the world economy will be of far-reaching significance” (Wen, 2001). China could have a bigger impact on the global economy than the other economies in the future. China’s integration with the global economy represents its rapid expansion of international trade (Prasad, 2004). “Since the late 1970s, exports and inward foreign direct investment (FDI) in China have risen dramatically under the open-door policy. The contribution of FDI in China’s exports has been widely recognized” (Zhang and Song, 2001, p. 385). “Attracting foreign direct investment (FDI) has been a strategic