The Financial Sector

by

Lynette Ong

• LAST REVIEWED: 14 October 2020
• LAST MODIFIED: 22 April 2013
• DOI: 10.1093/obo/9780199920082-0038

Introduction

The financial sector plays a critical role in powering economic growth by intermediating between savers and borrowers. Hence, the financial sector in China is crucial for the functioning of its economy. The banking sector in China was established only in the mid-1980s, and full-fledged banks were developed only in the mid-1990s. Prior to that, China had a monobank system where the People’s Bank of China (PBoC) functioned as the central bank and the only bank in the country. With liberalization and development of the market economy, the financial sector had to be expanded to serve credit demands of companies and residents. Up to this day, the banking sector as a whole is predominantly state owned, and it remains heavily protected. To some extent, the banking sector is still a state instrument in fulfillment of the state’s objectives. Interest rates are still controlled by the government, and bank credit is frequently directed to state-favored companies and projects. China’s capital market remains at a rudimentary stage. Local stock markets are often utilized by provincial and municipal governments for political purposes. The rural banking sector was liberalized toward the end of the first decade of the 21st century to allow acquisitions of banking licenses by foreign institutions and cross-regional local banks. This is an important step in improving efficiency of rural savings, but many rural banking institutions still have inadequate corporate governance structure, as highlighted by some of the works in this bibliography.

General Overviews

There are a number of works that aim to provide a general introduction and overview of the financial sector. Included in this list are works written in the early 21st century; those written prior to that are usually outdated. The citations included here are suitable for graduates and senior undergraduates, unless specified otherwise. Both Naughton 2007 and Wu 2005 are designed to provide an introduction to and overview of the financial system, but the former is a lot more readable than the latter. Allen, et al. 2012 provides an update to the sector. Herd, et al. 2010 and World Bank and International Monetary Fund 2011 assess the sector’s recent developments, particularly the question of whether it helps private-enterprise growth. Laurenceson and Chai 2003 examines the question of financial-sector development and economic growth. Allen, et al. 2008 is an argument that the role of the stock market in resource allocation has been both limited and ineffective.

• Allen, Franklin, Jun Qian, and Meijun Qian. “China’s Financial System: Past, Present, and Future.” In China’s Great Economic Transformation. Edited by Loren Brandt and Thomas G. Rawski, 506–569. Cambridge, UK: Cambridge University Press, 2008.

  The current financial system is dominated by a large but inefficient banking sector. The most successful sector of the financial system consists of alternative financing channels, governance mechanisms, coalitions, and institutions.

• Allen, Franklin, Jun Qian, Chenying Zhang, and Mengxin Zhao. “China’s Financial System: Opportunities and Challenges.” In Capitalizing China. Edited by Joseph P. H. Fan and Randall Morck, 63–149. Chicago: University of Chicago Press, 2012.

  Provides a comprehensive overview of the financial sector, including the banking sector, the stock market, real estate, private equity, venture capital, and asset management.

• Herd, Richard, Samuel Hill, and Charles Pigott. China’s Financial Sector Reforms. OECD Economics Department Working Paper 747. Paris: OECD, 2010.

  DOI: 10.1787/5kmlh5n23mzs-en

  Provides a good update of financial-sector reforms implemented in the early 21st century. Raises issues concerning the financial system’s ability to serve the private sector and the extent to which banks’ lending decisions are based purely on commercial considerations. Also available online by subscription at OECD iLibrary.

• Laurenceson, James, and Joseph C. H. Chai. Financial Reform and Economic Development in China. Cheltenham, UK, and Northampton, MA: Edward Elgar, 2003.

  This book examines the impact of financial reform on economic development, by analyzing the banking sector, nonbank financial institutions, stock market development, and external financial liberalization.

• Naughton, Barry. The Chinese Economy: Transitions and Growth. Cambridge, MA: MIT Press, 2007.

  In chapter 19, “Financial System” (pp. 449–485), there is a good introduction and overview of the financial system. Written by an economist but in a style suitable for general audience. Could be assigned to senior undergraduate or graduate courses in political economy or economic development of China.

• World Bank and International Monetary Fund. China: Financial Sector Assessment. Washington, DC: World Bank and IMF Financial Sector Assessment Program, 2011.

  China’s financial-system reform efforts since 2003 have had positive results, particularly the Chinese government’s adoption of a series of policies enhancing the financial sector’s resilience and, on the structural side, strengthening a large part of domestic financial institutions and improving market confidence. However, risks, challenges, and development opportunities remain.

• Wu, Jinglian. Understanding and Interpreting Chinese Economic Reform. Mason, OH: Thomson / South-Western, 2005.

  In chapter 6 (pp. 217–253), “Reform of the Banking System and Development of the Securities Market,” is an overview of the financial sector. However the volume reads like translations from Chinese-language articles in style and prose.