Corporate governance of China’s city commercial banks

The reform of China’s banking system, which has lagged other economic sectors in terms of state interventions and openness, is critical to the success in developing the country into a sustainable, competitive and prosperous economy. While progress has been made with marketization and a more diversified mix of new banking institutions, the dominance of the four major state-owned banks has continued to entrench biases and distortions in credit allocations and barriers to credit access for the rapidly growing non-state economy. City commercial banks (CCBs) were created in the 1990s to rationalize and regularize the numerous poorly managed former credit co-operatives aimed at introducing a new form of banks which would be more market-responsive to the new demands from the rapid urbanization process. While CCBs have attained considerable progress in gaining market shares and reducing bad loans, their governance structures are still saddled with significant state ownership. Substantive improvements are needed if weak corporate governance is not going to be the key impediment to CCBs’ future survival and development in a rapidly changing financial system where the role of banking itself is being challenged by new technology and business models.