Chinese banking system - Essay Example

Introduction In every country, every functioning financial system including financial markets and intermediaries such as the banking sector help to move that economy, but how these two sectors contribute to the entire financial system and the economy differs significantly from one country to another. With China’s accession to World Trade Organisation (WTO), and with her compliance with WTO agreements vis-à-vis their financial system, it is likely that this may cause many distorting effects on major countries.

China has undertaken to keep their currency undervalued thereby pushing countries like the USA to have a trade deficit of more that USD$200 billion in 2005 and expected to be some USD$240 billion in 2006 with accumulated foreign currency reserves of more than USD $1 trillion in 2006 with China, that the Central bank and government has been injecting into the largest state-owned banks in order to boost their capital reserves and balance sheets so that they can become publicly listed companies.

1 But with the unilateral trade liberalization all due to China’s accession to the WTO, the import regime that was extraordinarily complex and regulated with highly restrictive policy instruments, such as tariffs, quotas, and licensing requirements, and an array of other tools all geared at limiting the number of companies authorized to carry out trade transactions and restricting the range of goods that each of these companies was allowed to trade, has been almost entirely transformed and demolished.

2 Characteristics of Chinese banking system and financial markets In the banking sector, Chinese financial system is by and large dominated by large but under-developed banking system, which is mainly controlled by the four largest state-owned banks with a large amount of non-performing loans (NPLs). These state-owned banks will a lot of power by using the money injected into their business from the large foreign currency reserves to give out loans to selective borrowers in particular, state-owned banks and to selective investment projects.

But with the on going privatization in the banking sector, this will permit the entrance into the sector of more domestic and foreign banks that will be of great importance since it will stimulate the banking sector and bring in more competitiveness and root out all the NPL. In the financial market sector, Chinese Financial markets have been characterised by speculation and insider information and has not been very successful in the effective allocation of resources as the banking sector. China has two main financial markets, the Shanghai Stock Exchange (SHSE hereafter) and Shenzhen Stock Exchange (SZSE hereafter) all established in 1990 and have been growing at a tremendous rate.

But these markets have not been working at the rate which can bring in some improvements in the Chinese financial market sector. This is all due to encumbrances and poor regulation at the level of the regulatory environment particularly in the corporate and trading laws, legal protection of investors, and as well as institutions governing the enforcement of contracts that have all been poorly developed. The poor functioning of these markets is also linked to the fact that large blocks of shares are held by various government entities in listed companies (including state-owned banks).

A planned reduction of these government owned entities by selling them off slowly over time will greatly improve the functioning of the financial market. The market is plagued by the lack of trained professionals such as accountants, investment bankers, and (business) lawyers. There is just no incentive to motivate financial intermediaries that should act as institutional investors for the smooth running of the market are just totally unavailable especially when one has to look at the role they play in improving the efficiency of the markets and strengthening the corporate governance of listed firms.

All of these have led to the market trading in almost old and same kind of assets. Therefore, all of these forces are needed to develop new financial products and markets. References Aharony, Joseph, Jevons Lee, and T.J. Wong, 2000. “Financial Packaging of IPO Firms in China,” Journal of Accounting Research 38, 103-126. Bai, Chong-En, Qiao Liu, Joe Liu, Frank Song, and Junxi Zhang, 2004. “Corporate Governance and Market Valuations in China,” Journal of Comparative Economics 32, 599-625.

Bonin, John, P., and Yiping Huang, 2001. “Dealing with the Bad Loans of the Chinese Banks,” Working Paper 357, William Davidson Institute, University of Michigan Business School. Cull, Robert, and Colin Xu, 2005. “Institutions, Ownership, and Finance: The Determinants of Reinvestments of Profit among Chinese Firms,” Journal of Financial Economics 77, 117-146. Franklin Allen, Jun Qian, Meijun Qian (2005): China’s Financial System: Past, Present, and Future