Pakistan Institute of Development Economics


Chinese Banking Reforms: An Analysis and Evaluation of Non-Performing Loans

In developing and transition economies, the importance of a well-functioning banking sector has been acknowledged for economic growth and development [La Porta, et al. (2002)]. In recent years, the banking sector reforms have become a high priority policy agenda for these countries. There are many commonalities in banking systems of transition economies, such as poor risk management skills, lack of managerial expertise, weak legal and regulatory framework, poor oversight of institutions and underdevelopment of credit assessment system. Deregulation and financial liberalisation along with the creation of two-tier system are the similarities of earlier market-oriented reforms. The privatisation of state-owned banks is the subsequent strategies for financial reforms. The prevalence of state ownership is one prominent feature of banking system in transition economies. The existence of state ownership in banks is based on the argument that those sectors which has high social return but weak financial standing are unable to attract the private capital, hence the government channel the capital to those sectors and projects, in order to keep their social return high.

The banking system in China is heavily influenced by the state and less skilled in term of credit assessment and risk management. However, the on-going banking sector reforms have significantly improved the asset quality and enhanced the banking sector performances. In wake of these reforms, a significant reduction in non-performing loans (NPLs) are observed with the increase in profitability. It is also a fact that the immediate improvement in the asset quality is not only attributed by the banking sector reforms but also by transferring the NPL’s from banks to asset management companies to clean up the balance sheets of state owned commercial banks (SOCB’s). Whether the on-going banking sector reforms could make the banking system viable in the long-run or it needs more fundamental changes to improve the asset quality of the Chinese banking sector is unknown and will be examined by this study.

Ramiz Ur Rehman, Inayat Ullah Mangla and Junrui Zhang

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