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The Contradiction in China's Gradualist Banking Reforms

Chicago GSB Research Paper No. 08-07

University of Chicago Graduate School of Business Working Paper No. 4

52 Pages Posted: 5 Aug 2008  

Wendy Dobson

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

Date Written: August 15, 2007

Abstract

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.

Suggested Citation

Dobson, Wendy and Kashyap, Anil K., The Contradiction in China's Gradualist Banking Reforms (August 15, 2007). University of Chicago Graduate School of Business Working Paper No. 4; University of Chicago Graduate School of Business Working Paper No. 4. Available at SSRN: https://ssrn.com/abstract=1193362 or http://dx.doi.org/10.2139/ssrn.1193362

Wendy Dobson

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-2451 (Phone)
N/A (Fax)

HOME PAGE: http://www.rotman.utoronto.ca/dobson/

Anil K. Kashyap (Contact Author)

University of Chicago, Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7260 (Phone)
773 702-0458 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-7260 (Phone)
773-702-0458 (Fax)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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