China's Banking System

Alfreda V. Davis, Colleen Dougherty, Jason D. Juranek, Raj Yelisetty

Abstract


This paper examines the Banking System of China and explores in detail the policy reforms and restructuring of its banks to create a market based economy. We evaluate the history of the China Banking system, the restructuring and financial liberalization that has occurred over the last 11 years. The inception of the reform policies startedin 1995 with the first set of laws introducing commercial banks and new governance of the Peoples Bank of China (PBC).  We examine the impact and implications of the numerous policy reforms and milestones that are shaping the financial and monetary sectors in China today.

This paper further examines the implications of the WTO agreements and Basel accords on the Chinese Banking System.  The WTO agreements signed by China in 2001 will open up the China banking system to foreign investors and allow them to operate in the retail markets in domestic currency without any business or geographical limitations.  The impact of this agreement is significant as it will broaden the reach of  all banking services—  even to Chinese households and  allow foreign affiliates to enter with fewer restrictions.  Even though these agreements are effective this year, the expected systemic benefits are several years away; however this is a critical milestone that will help achieve solvency, promote competition and hopefully create sustainability.

We conclude the paper with the future actions needed to further strengthen the Chinese Banking System that include more aggressive actions as well as faster execution of banking reform policies that will accelerate China’s financial success.


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