Comparative Analysis of the Financial Systems in China and India

Abstract

Financial system which is an interplay of financial institutions, markets, instruments and services, facilitates transfer of funds and thus plays a significant role in facilitating economic activity and growth of the economy. Over the years the role of an efficient and robust financial system has been the pillar for sustainable development. The fear of market failure has been the rationale for intervention by the State in many countries thus forming the basis for institutionalization.

China has a bank dominated financial system. China has moved from a closed, centrally planned economy to a more market-oriented economy. Chinese financial system has changed in the last 40 years. Since 1990s banks were driven commercially and diversified their activities. China's "Big Four" banks dominated the top of the world ranking for banks with more than $3 trillion in assets and have a combined asset value of $13.784 trillion in 2019. By the end of 2016, the Chinese Capital markets ranked the second largest globally by market capitalization. Trust companies, mutual fund and venture capital are developing. The informal financial sector is a reality. China's banking system plays a predominant role in financial inter-mediation and the high savings rate. Foreign-owned banks, in aggregate, represent only a small part of the Chinese banking system. Banks dominate the Chinese financial system and the bond market is underdeveloped, unlike the US.

In India, the bank based financial system has been dominant as the Government has had a direct hand in industrial development. Nationalization of banks, administered interest rates led to the predominance of bank based financial system. Post liberalization, the Indian Financial System has evolved with greater access to the markets. Globalization, liberalization has been pivotal in changing the environment for the banks and financial institutions.

Banking system across different countries of the world is adopting financial standards, though at different speeds. The emerging economies banks are expected to grow faster than the developed economies. However, the performance of banks of emerging economies reflects increase in stressed assets over time. Both China and India adopted the financial sector reforms to improve financial stability and efficiency. The financial systems of the two economies have played a significant role in enhancing the growth of the economy and will impact the rest of the world as it evolves.

The research undertaken is a descriptive and diagnostic study with an emphasis on understanding the evolution of the Chinese and the Indian Financial System.

Keywords: Banking, Comparative Analysis, China, Financial System, India