#08-28
A Review of China’s Financial System and Initiatives for the Future
Franklin Allen, Jun "QJ" Qian, Meijun Qian and Mengxin Zhao, July 2008
Abstract: We provide a comprehensive review of China’s financial system, and explore directions of future
development. First, the current financial system is dominated by a large banking sector. In recent years banks
have made considerable progress in reducing the amount of non-performing loans and improving their
efficiency. It is important that these efforts are continued. Second, the role of the stock market in allocating
resources in the economy has been limited and ineffective. Further development of China’s stock market and
other financial markets is the most important task in the long-term. Third, 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, and institutions. This sector should coexist
with banks 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.
