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Banking reform in China: Driven by international standards and Chinese specifics

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  • Kudrna, Zdenek

Abstract

This paper reviews the progress of banking reforms in China over the last five years. The stated goal of reform is to “transform major banks into internationally competitive joint‐stock commercial banks with appropriate corporate governance structures, adequate capital, stringent internal controls, safe and sound business operations, quality services as well as desirable profitability.” The reform strategy relies on three pillars – extensive publicly financed bailouts, implementation of the international best practices in bank governance and regulation and listing of major banks at the Hong Kong stock exchange. This strategy has been successful in stabilizing the three major banks. However, our review of academic and commercial research indicates that there is no evidence that the stabilization is sustainable. Prudential indicators of the largest banks are comparable to international averages, but this is an outcome of large bail outs and ongoing credit boom rather than fundamental change in banker’s incentives. Reforms of bank governance and regulatory framework need more time to proliferate throughout the banking and regulatory hierarchies. However, time alone would not solve the problem as the reform design retains important departures from international standards. These standards are implemented in a selective manner; those aspects that help to concentrate key powers in the center are implemented rather vigorously, whereas principles that require independence of banks’ boards and regulators are ignored. Thus the largest Chinese banks remain under the firm state control and can be used as development policy tools for the better or the worse.

Suggested Citation

  • Kudrna, Zdenek, 2007. "Banking reform in China: Driven by international standards and Chinese specifics," MPRA Paper 7320, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:7320
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    References listed on IDEAS

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    Cited by:

    1. Ralf Bebenroth & Diemo Dietrich & Uwe Vollmer, 2009. "Bank regulation and supervision in bank-dominated financial systems: a comparison between Japan and Germany," European Journal of Law and Economics, Springer, vol. 27(2), pages 177-209, April.
    2. Jiang, Wei & Zeng, Yeqin, 2014. "State ownership, bank loans, and corporate investment," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 92-116.
    3. Charles Kwong, 2011. "China's Banking Reform: The Remaining Agenda," Global Economic Review, Taylor & Francis Journals, vol. 40(2), pages 161-178.
    4. Bin Liu, 2011. "The Effects of Public Listing on the Performance of Banks in China," Working Papers 072011, Hong Kong Institute for Monetary Research.

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    More about this item

    Keywords

    China; banks; reform; international standards;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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