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The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of China published on 2 February 2010.
Banking and financial market reforms need to continue
Considerable headway has been made in implementing key financial reforms, including those reviewed in the previous Economic Survey. This has been facilitated by the vigorous economic expansion and, together with a limited exposure to toxic overseas assets, has enabled Chinese banks to weather the global slowdown well so far. The recent surge in lending, however, carries the risk of imprudent borrowing by local authority infrastructure companies and of a resurgence in non performing loans. Financial institutions have broadened the scope of their activities, housing and consumer credit have expanded rapidly and new financial instruments and facilities have been introduced. The corporate governance structures and risk management systems of the commercial banks have improved. Restrictions on the trading on the exchanges of state-owned and legal-person shares have been eased and securities market institutions have been modernised. In conjunction with banks’ new ability to lend for mergers and acquisitions, this could create a market for corporate control. As yet though, there have been few examples of newly tradable shares actually being traded. Efforts have also been made to improve credit access for underserved segments, notably small and medium-sized enterprises and rural China. Steps have been taken to relax controls on international capital flows, and Chinese financial institutions are becoming a growing presence in OECD and other foreign countries, although liberalisation has been slow and the foreign share of their assets remains very small.
Over the longer term, financial system development is likely to be conditioned by decisions about broader economic reforms, for instance, with respect to pensions. While State ownership is likely to continue to prevail in the financial system for the foreseeable future, the pace at which such arrangements should evolve as the private sector expands is a major issue. Raising the ceilings on foreign investment in banks and other financial institutions would put pressure on these institutions to upgrade their governance, management and technical capabilities, and would facilitate their international expansion. It would also help in light of the general need, in the wake of the global financial crisis, to bolster bank capital and improve risk management. Although the bond market has expanded, corporate bond issuance remains relatively small. Establishing a formal deposit insurance system would help equalise competitive opportunities between larger and smaller commercial banks. Strengthening the Banking Regulatory Commission’s capacity to conduct regular on-site examinations of more commercial banks would help accelerate the implementation of banking reforms.
Bank market shares
Note: Figures refer to share of total banking assets. SOCB- State-owned commercial banks; JSB- joint-stock commercial banks; CCB- city commercial banks and co-operatives; Fbanks- foreign banks. Total banking assets include assets of trusts and commercial finance and leasing companies.
Source: China Banking Regulatory Commission.
How to obtain this publication
The complete edition of the Economic Survey of China is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the China Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Richard Herd, Samuel Hill and Yu-Wei Hu under the supervision of Vincent Koen. Research assistance was provided by Thomas Chalaux.