In the banking sector, Chinese financial system is by and large dominated by the large but underdeveloped banking system, which is mainly controlled by the four largest state-owned banks with a lot of non-performing loans. 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 entry 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.Chinese Financial markets have been characterized by speculation and insider information and have not been very successful in the effective allocation of resources as the banking sector. China has two main financial markets, the Shanghai Stock Exchange and Shenzhen Stock Exchange 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.