The Economic Intricacies of Banking Reform in China

Kui-Wai Li () and Jun Ma

Chinese Economy, 2004, vol. 37, issue 4, 50-77

Abstract: This article discusses some of the economic constraints facing the efficient performance of Chinese banks. While the condition of accession to the World Trade Organization (WTO) requires that banking in China will open to foreign competition by 2006, large nonperformance loans and the lack of international accounting standards continue to plague Chinese banks. This article considers the theory of financial liberalization and the social function of banks and uses bank data to simulate the effective operations of four policy instruments of greater interest-rate spread, tax and cost reduction, and recapitalization. Recapitalization, either by the government or from foreign sources, is the most effective instrument in eliminating nonperforming loans. Despite some favorable recent developments, the article concludes that there should be no further delay in effective bank reform in China.

Date: 2004
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