Chapter 6: Banking and Finance
INTRODUCTION The health of China’s banking and financial sectors is critical to the growth prospects of the economy. These sectors, though, require a number of significant reforms, not limited to the legacy of issues from a centrally planned economy such as the problem of non-performing loans (NPLs), but also the challenges raised by foreign competition after China’s accession to the World Trade Organization (WTO) in 2001. Despite having an underdeveloped banking and financial system, China agreed to liberalise these sectors as part of its WTO commitments. Financial liberalisation after WTO accession will be one of the major sources of opportunities to stimulate growth, but will also pose risks for China in the near future. The reform of these sectors will also affect the reform of the currency, the future of savings and investment, and the risk of macroeconomic instability, among other things, all of which will have implications for China’s ability to sustain its economic growth. 2. 2.1 BANKING IN CHINA Background Under central planning, China’s banking and financial system was essentially an arm of the state. The People’s Bank of China (PBOC) was the sole bank from 1949 until the 1980s reforms with responsibilities for both central and commercial banking operations. Cooperative banks existed to serve rural areas, but there was little else in terms of a financial system. Since market-oriented reforms began in 1979, the banking sector has gradually been reformed. In the mid 1980s, the commercial banking functions of the PBOC were split off into four state-owned...
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