What Are The Challenges Of China's Financial System

921 Words4 Pages
China’s financial system has gone through several rounds of reforms in the past decades and yet still facing many challenges as the economy grows. In the following sections, I will detail some of the main challenges the system is facing and examine possible reform actions that could be taken. As discussed in the previous section, although the large banks in China have been able to keep a high level of profitability, there is still a huge space for improving their efficiency. The banks are largely controlled by the government and favors lending to SOEs under the governments’ guidance. The governments’ ownership could serve well to help banks avoid major problems which has happened in developed countries, such as the 2007-2009 global…show more content…
It should, however, be acknowledged that biased lending is not an issue that solely exists in China but also in many developed economies because banks everywhere in the world tend to have the tendency to lend to large and more stable corporations out of risk consideration. Thus, the role of the shadow banking sector is especially important for filling in the lending gap and the reform in the sector’s regulation plays a key role in making the sector efficient and reliable. First of all, the authorities should first consider slowing down the fast growth of the sector, so that long term strategic plans have sufficient time to be implemented. In addition to loosing the control on large banks’ lending activities, the authorities can curb shadow banking’s growth by letting banks set a higher deposit rates and thus reduce the level of interest on purchasing various wealth management products from the shadow banking sector. The authorities can also strengthen regulation by requiring these financial institutions to bring their off-balance sheet liabilities and assets on-balance to ensure banks have a sufficient capital base to back their high-risk assets. This measure could improve their risk management capability. Further, it is important for shadowing banks to work on their transparency to their customers. These financial institutions should be required to disclose detailed information about their wealth management products,
Open Document