China’s Banking System Risks Related to Government Intervention
 
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Publish date: 2014-02-28
 
Gospodarka Narodowa 2014;269(1):33–51
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ABSTRACT
The article analyzes possible threats to the stability of China’s banking sector. The research method used by the author includes a review of literature and empirical studies. The analysis shows that government intervention in the banking industry poses a series of risks to the country’s financial stability and blocks further development of the Chinese banking sector. China’s banking industry is dominated by five big state­ owned banks and there is no competition on the market, the author notes. Retail interest rates are capped very low in terms of inflation and cheap capital is channeled mainly to big state­ owned companies. This helps sustain economic growth at a high level. However, this kind of policy poses risks to the banking sector and the Chinese economy as a whole, Bisewska says. The author argues that ineffective allocation of funds leads to overinvestment in some sectors and to asset bubbles. As Chinese consumers and small and medium­ sized enterprises have limited access to credit, Bisewska notes, the shadow banking system is growing rapidly - not only in the form of illegal private lenders, but also as the off‐balance sheet activities of commercial banks. Another major threat to the system is a cyclical lending spree stemming from the need to generate fast economic growth through investment. Local governments are expected to finance many infrastructure projects, yet their revenue is insufficient, the author says. They are forced to borrow money from commercial banks, but in most cases are unable to pay their debts. As a result, there is a growing problem of non‐performing loans. The author concludes that interest rate liberalization, coupled with reduced government control over the banking sector and the introduction of a competitive environment, would have a positive impact on the Chinese financial system and the economy as a whole.
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