Commercialisation of state banks as part of the banking reform in China

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Commercialisation of state banks as part of the banking reform in China

 

Author: Sieh, Shi-mei Stella
Title: Commercialisation of state banks as part of the banking reform in China
Degree: M.Sc.
Year: 2000
Subject: Banks and banking -- China
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Dept. of Management
Pages: 83, [14] leaves : ill. ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1568965
URI: http://theses.lib.polyu.edu.hk/handle/200/4910
Abstract: Financial development has always been crucial for economic growth in China. Since the late 1970s, China has emerged as one of the fastest growing economies in the world, whether China will be able to sustain its economic growth will very much dependent on the development of its financial system which had always been the driver to stimulate growth of the industrial and agricultural sectors. China's banking reform first initiated in 1979. Before, the banking system was acted like a cashier for cash, credit and settlement between the state, SOEs and households. The purpose of the reform was therefore to change this system into a liberalise one by reducing control by central bank and turning those state banks into profit-making commercial banks. From 1979-1989, some evolutionary changes on the structural framework of the banking system had been taken place. Later in the 1990s, enactment of several laws and regulations emerged and more monetary policies were introduced. However, to move forward its banking reform, China faces serious problems and obstacles ahead. The Chinese government had realized that the failure to tackle these problems could lead to disastrous consequences. One of the major problems is the massive bad debts that have been accumulated in those state banks. These bad debts mainly originated from SOEs that are impossible to go bankrupt, chances to recover those bad debt therefore becomes minimal. Lack of a proper price mechanism is another problem in the PRC, as it is a planned economy, all prices are set by the state (ie. including interest rates), supply and demand theory does not apply here, financial resources cannot be allocated efficiently. The entire banking system is still under strict administrative control, who intentionally to protect state banks' profitability, inhibit competition and new entries such as foreign financial institutions and the private sector. There is no proper legal protection or supervisions, frauds and corruptions are common. The state banks themselves are badly managed, suffered from low profitability and inefficiencies. On the other hand, the government has the social responsibility, pushing the reform too quickly would cause massive unemployment and social instability. To solve these problems, China was widely recommended to follow other western countries' models, liquidate SOEs, restructure the banking sector by accelerating the disposals of NPLs in state banks, increase transparency, reduce administrative controls and most importantly, to change the lending culture from "guanxi" to more commercial basis. Of course, one cannot rule out the establishment of protective and prudential regulations. Opening its financial market and devaluing the yuan are other possible solutions. This is because it will allow efficient allocation of resources, stop subsidies channeling, into those SOEs, promote export and indirectly driving those loss-making SOEs out of the market. To conclude, there is still a long way to go before China will have an efficient and liberal banking system like those in the western countries. The state banks will still need to go ahead with the reforms but will be a very long and slow process.

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