China's Banking Reform: The Remaining Agenda

Since 1994, China has endeavoured to establish a banking system that works more closely to commercial principles by transforming the specialized banks (SBs) into state-owned commercial banks (SOCBs). However, lending decisions of the SOCBs were still determined by state directives instead of profitability consideration. This paper argues that although the post-WTO banking reforms have accomplished staggering results, China's SOCBs need an overhaul of ownership structure if China aims to develop a full-fledged market-based banking system. It also argues that the current banking reforms are not comprehensive enough to sustain China's long-term economic development because there still remain noticeable capital constraints facing small- and medium-sized private enterprises, particularly those in rural areas.