Tuesday, August 23, 2005

China's Financial System

Allen, Qian, and Qian
give a fascinating look at China's Financial System. The auhtors do an excellent job both explaining what exists and hypothesizing as to what will happen in the future as a result of current conditions.

Some highlights: The paper comes to 4 broad conclusions. In the authors' words:
  1. "...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."
  2. "... 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."
  3. "...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."
  4. "... 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.""
With respect to the stock market reform, Allen Qian, and Qian have several specific ideas:
""...the regulatory environment should be improved; in particular, corporate and
trading laws and legal protection of investors, as well as institutions governing the enforcement of contracts should be further developed. Second, the large blocks of shares held by various government entities in listed companies (including state-owned banks) should be reduced by announcing and carrying out a plan to sell them off slowly over time. Third, more professionals such as accountants, investment bankers, and (business) lawyers, should be trained. Fourth,
domestic financial intermediaries that act as institutional investors should be encouraged, as they will play a critical role in improving the efficiency of the markets and strengthening the corporate governance of listed firms. Finally, new financial products and markets should be developed."
A definite "must read". I warn you the paper is long (over 100 pages in total), but it has many good points and is well worth reading!

Franklin Allen, Jun Qian, and Meijun Qian. "China’s Financial System: Past, Present, and Future", Wharton Financial Instititions working paper (available online at http://fic.wharton.upenn.edu/fic/papers/05/p0517.html accessed 8/22/2005)
(also part of a book entitled China’s Financial System: Past, Present, and Future.)

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