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

Alicia Garcia-Herrero, Sergio Gavila and Daniel Santabárbara ()
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Alicia Garcia-Herrero: Bank of Spain
Sergio Gavila: Bank of Spain

Authors registered in the RePEc Author Service: Alicia Garcia Herrero ()

Finance from University Library of Munich, Germany

Abstract: 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.

Keywords: Chinese financial system; financial reform; bank restructuring; financial liberalization; bank regulation and supervision. (search for similar items in EconPapers)
JEL-codes: E44 E66 G2 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-his, nep-mac, nep-reg, nep-sea and nep-tra
Date: 2005-08-22
Note: Type of Document - pdf; pages: 52
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Journal Article: China's Banking Reform: An Assessment of its Evolution and Possible Impact (2006) Downloads
Working Paper: China's banking reform: An assessment of its evolution and possible impact (2005) Downloads
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