#11-54
China’s Financial System: Opportunities and Challenges
Franklin Allen, Jun "QJ" Qian, Chenying Zhang and Mengxin Zhao, October 2011
Abstract: We provide a comprehensive review of China’s financial system, and explore directions of future
development. First, the financial system has been 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. 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 co-exist 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: banks, non-performing loans, markets, hybrid sector, financial crisis
JEL classifications: O5, K0, G2.
