The Contradiction in China's Gradualist Banking Reforms
University of Toronto - Rotman School of Management
Anil K. Kashyap
University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago
August 15, 2007
Chicago GSB Research Paper No. 08-07
University of Chicago Graduate School of Business Working Paper No. 4
China's state-owned banks historically have funded money losing enterprises to maintain employment and social stability. We survey the banking industry in China, focusing on the largest banks which are being reformed to increase their competitiveness following China's 2001 WTO commitment to open the domestic banking market by 2007. We assemble macroeconomic, microeconomic and anecdotal evidence suggesting that government influence, while less explicit than in the past, is continuing despite the reforms. Indeed, the reforms thus far do not resolve the tensions between government influence and the obligation of widely-held commercial banks to make credit decisions based on objective appraisal of borrowers' ability to repay. We conclude that when growth slows the contradiction will become fully apparent and the government will resolve it by again bailing out the banks. We describe a pair of alternative bank reform proposals that would help to reconcile the government's conflicting objectives.
Number of Pages in PDF File: 52
Date posted: August 5, 2008
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