Financial reforms and corporate governance in China

The overriding objective of economic reforms in China has been to improve the efficiency of investments. While much of the earlier economic literature stressed the importance of capital accumulation and macro-economic coordination in promoting economic development, recent experiences suggest that microeconomic efficiency in selecting investment projects and choosing good managers may be much more important. This Note investigates the extent to which institutional changes in the financial system affect the efficiency of investments by creating behavioral changes in the enterprises, and more importantly, in the relationship between enterprises and financial institutions. This Note argues that a strong banking system will create a more effective corporate governance structure, given China's current stage of economic development and socialist past.