Deepening Banking Reforms of China to Ensure Sustainable Growth in a Global World

Abstract

The Chinese authorities agreed upon a five year transition period provided by the WTO timetable to open its financial sector more fully to foreign investment by the end of 2006. Since the end of 2001, when the government began encouraging foreign companies to invest in local banks, many foreign players have invested in Chinese financial institutions. Foreign banks paid $18 billion for stakes in China’s largest state-owned banks in 2005, in anticipation of selling products such as auto loans and credit cards through the banks’ vast networks. This could be seen as a way to pressure the reforms of China’s banking system, since the foreign investors will have an increasingly large stake in the success of China’s financial system. Important steps have already been taken to push forward these reforms, for instance through the creation of a Central Banking Regulatory Commission (CBRC) and foreign listings.’ However, foreign ownership stakes are still small, the banking reforms have not gone far enough and the state remains firmly in control. The ability of the banks to continue to extend credit to finance consumption and investments has clearly helped to sustain the economic growth, but rapid credit growth has also sparked new concerns about overheating and asset price inflation in the economy. The banking system has focused on financing the infrastructure, often encouraged by local authorities who are rewarded by the government for generating more growth.