China's Financial System: Past, Present and Future
Franklin Allen, Jun Qian and Meijun Qian, July 2005
Abstract: We examine and compare the role of China’s financial system in supporting the growth of firms and
the economy with that in other countries, and explore directions of future development. First, we find that
the current financial system is dominated by a large but inefficient banking sector, and reducing the amount
of non-performing loans among the major banks to normal levels is the most important objective for
reforming the financial system in the short run. Second, despite the fast growth of the stock market, its role
of resource allocation in the economy has been both limited and ineffective. Further development of China’s
financial markets is the most important long-term objective. Third, we find that the most successful part of
the financial system, in terms of supporting the growth of the overall economy, is a non-standard sector that
consists of alternative financing channels, governance mechanisms, coalitions, and institutions. This sector
should co-exist with banking and markets in the future in order to continue to support the growth of the
Hybrid Sector (non-state, non-listed firms). Finally, in order to sustain stable economic growth, China
should aim to prevent and halt damaging financial crises, including a banking sector crisis, a real estate or
stock market crash, and a “twin crisis” in the currency market and banking sector.
Keywords: O5, K0, G2.
JEL classifications : banks, non-performing loans, markets, corporate governance, hybrid sector, financial crisis.
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