Banking Reform in China: Catalyzing the Nation's Financial Future

17 Pages Posted: 29 May 2004

See all articles by James R. Barth

James R. Barth

Auburn University; Milken Institute

Rob Koepp

Milken Institute

Zhongfei Zhou

Queen Mary University of London, School of Law

Date Written: February 2004

Abstract

In 2003 China posted its highest economic growth rate in seven years, a robust 9.1 percent. Today the nation's gross domestic product (GDP) dwarfs by more than eight fold its level of 1978, the year China began taking its first tentative steps away from a centrally-planned communist economy towards a mixed socialist-market system. According to the World Bank, market reforms in China and the growth they have stimulated helped lift more than 250 million people from poverty (roughly equivalent to positively transforming the lives of the combined populations of England, France, Germany, and Italy). In 2003 China's per capita GDP surpassed the $1,000 mark for the first time in history. The greatest and most fundamental undertaking for China's financial reform over the coming years undeniably will occur in the banking sector. As with the situation throughout East Asia, businesses in China typically obtain external financing from banks rather than through the issuance of securities. Yet banking in China represents a glaringly fragile component in its economy. Poor lending policies of the past have produced a massive deadweight of nonperforming loans (NPLs). This article argues that investors and policy makers, while right to be concerned, would be patently wrong to ignore the tremendous upsides that should accompany China's banking reforms. Although now a soft spot in the Chinese economy, we contend that China's banking sector has the momentum and potential not only to be restored to health, but to play a catalytic role as a stimulant to further and sustained growth.

Keywords: China, Finance, Banking, WTO, Reform, Economic Growth

JEL Classification: E5, F3, F4, G15, G2, G3, H5, H8, K2, L5, N2

Suggested Citation

Barth, James R. and Koepp, Rob and Zhou, Zhongfei, Banking Reform in China: Catalyzing the Nation's Financial Future (February 2004). Available at SSRN: https://ssrn.com/abstract=548405 or http://dx.doi.org/10.2139/ssrn.548405

James R. Barth

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States
334-844-2469 (Phone)
334-844-4960 (Fax)

Milken Institute ( email )

1250 Fourth Street
Santa Monica, CA 90401
United States

Rob Koepp (Contact Author)

Milken Institute ( email )

1250 Fourth Street
Santa Monica, CA 90401
United States

Zhongfei Zhou

Queen Mary University of London, School of Law ( email )

67-69 Lincoln’s Inn Fields
London, WC2A 3JB
United Kingdom

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