Financial Reform and Economic Development in China
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Financial Reform and Economic Development in China

James Laurenceson and Joseph C.H. Chai

This book is a comprehensive, balanced and realistic assessment of China’s financial reform program and future direction. Covering not only the banking sector but also non-bank financial institutions, stock market development and external financial liberalization, the authors examine the impact of financial reform on economic development in China during the reform period. This volume will facilitate a more accurate assessment of the Chinese approach to financial reform, and will therefore, allow more informed future policy choices for both China and other developing and transitional countries.
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Chapter 4: The Performance of China's State-owned Banks

James Laurenceson and Joseph C.H. Chai


4. The performance of China’s stateowned banks INTRODUCTION This chapter considers the economic development implications of the SOBs’ lending. Since 1995, China’s SOBs have been labeled as commercial banks in official statistical publications and Chinese law. The behavior of a commercial bank in a purely market economy is dictated by its optimization problem, that being, to maximize expected profits subject to a risk constraint (Santeromo, 1984, p. 580). This objective function means that loans, for example, will be allocated to those projects that offer the highest expected rate of financial return. Commercial banks will also diversify their loan portfolios and maintain a strong capital base to more effectively manage risk. Given these objectives, the performance of a commercial bank can largely be determined by examining its balance sheet and calculating measures of financial return such as profitability, and measures of solvency such as capital adequacy. This has become the standard approach to evaluating the performance of China’s SOBs in both academic circles and the mainstream press (Lardy, 1998a, pp. 76–127). The profitability of SOBs has declined markedly since the mid-1980s when they were amongst the most profitable in the world (Girardin, 1997, p. 32). Their pre-tax profit/asset ratio dropped from 1.4 percent in 1985 to just 0.2 percent in 2000 (Lardy, 1998a, pp. 93; The Banker, July 2001, p. 164). In a survey of the world’s 1000 largest commercial banks taken at year-end 2000, the four largest SOBs, Industrial and Commercial Bank of...

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