China's Banking Reform: An Assessment of its Evolution and Possible Impact

Bank of Spain Ocassional Paper No. 0502

June 2006CESifo Economic Studies 52(2):304-363

52 Pages Posted: 14 Dec 2005 Last revised: 3 Aug 2021

See all articles by Alicia García-Herrero

Alicia García-Herrero

Bruegel; Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS); Natixis

Sergio Gavila

Banco de España

Daniel Santabárbara

Banco de España

Date Written: 2005

Abstract

The Chinese banking system, characterized by massive government intervention, poor asset quality and low capitalization, has started a reform process based on three main pillars: (i) bank restructuring, through the cleaning-up of non-performing loans and public capital injections, particularly in the four largest state-owned banks; (ii) financial liberalization, with the gradual flexibilization of quantity and price controls, the opening-up to foreign competition and cautious steps toward capital account liberalization; and (iii) strengthened financial regulation and supervision, coupled with efforts to improve corporate governance and transparency. Although the reform is still ongoing, our preliminary assessment indicates that changes are needed for the reform to be fully successful. Asset quality has improved, particularly in the recapitalized banks, but there is a high risk of a new build-up of non performing loans. Capitalization has increased in the largest banks, as a consequence of the government capital injections, but it generally remains low and profitability has fallen even further. China's huge financing needs, to maintain high economic growth, and its commitment to fully open up its banking system to foreign competition urgently require a more comprehensive and time-bound strategy, with a long-term vision of the desired structure of the Chinese banking system. Bank recapitalization should be completed immediately, not only to ensure bank soundness, but also to increase profitability, which could be affected negatively as competition increases with full financial liberalization. Bank ecapitalization, however, needs to be accompanied by a radical improvement in corporate governance, which would clearly be facilitated by a change in the property structure.

Keywords: Chinese financial system, financial reform, bank restructuring, financial

JEL Classification: E44, E66, G2, G21

Suggested Citation

Garcia-Herrero, Alicia and Gavila, Sergio and Santabárbara, Daniel, China's Banking Reform: An Assessment of its Evolution and Possible Impact (2005). Bank of Spain Ocassional Paper No. 0502, June 2006CESifo Economic Studies 52(2):304-363, Available at SSRN: https://ssrn.com/abstract=854944 or http://dx.doi.org/10.2139/ssrn.854944

Alicia Garcia-Herrero (Contact Author)

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS) ( email )

IAS 2019, Lo Ka Chung Building,
Lee Shau Kee Campus, HKUST
Clear Water Bay, Kowloon
Hong Kong

Natixis ( email )

France

Sergio Gavila

Banco de España ( email )

Madrid 28014
Spain

Daniel Santabárbara

Banco de España ( email )

C/ Alcalá, 48
Madrid, 28014
Spain

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