An Overview of China's Financial System

Abstract

We provide a review of China's financial system and consider the challenges it faces and future reforms. The formal sectors of the financial system, which include a fast-growing stock market and are dominated by a banking sector with large state-owned banks, have played a critical role in financing the state sectors and the investment-driven economic growth model. However, the formal sectors have not served the needs of the private sectors or of households; these dynamic sectors have been financed by alternative finance sectors operating largely outside the markets and formal institutions. Going forward, financial markets need to be further developed to provide more support for the private sectors, including technology and services industries; the formal and alternative sectors should work together to improve the efficiency of resource allocation to better support the new model of consumption- and innovation-driven growth. Finally, the financial system needs to reduce the likelihood of damaging financial crises, which have included a real estate crisis, a banking crisis triggered by defaults on corporate and local government debt, and a twin crisis in the currency market and the banking sector.

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