Feasibility of China’s Financial Reforms

Abstract

Despite the diversity of China’s financial system and the reforms that have already occurred, the system is heavily bank-dominated, and the Big Four extend almost half of all loans in China. These banks often extend loans to state-owned enterprises and in recent years have had the largest proportion of nonperforming loans (NPLs). These large, state-owned banks have been shown to be less efficient than other types of banks (such as joint-stock or city-owned banks) in China. Although interest rate liberalization has marked a major step toward financial marketization, implicit government guarantees, inaccurate credit ratings, and segmented markets have prevented the free movement of interest rates in unleashing market forces. It is argued that deteriorating economic indicators forces the government to focus on ensuring sufficient liquidity in the economy. Hitting China’s ever-present growth target appears to be a priority that supersedes reform objectives in the financial sector.