Mission completed or problems unsolved? A policy review of China’s banking reform

Starting in the 1980s, the Chinese government embarked on a series of banking reforms in response to the changing conditions of domestic and international economies. The reform in the 1980s marked the starting point of reinstituting the state-owned specialised banks (SBs) and these banks functioned primarily as fiscal agents for the central government to accomplish planned targets in the 1980s and early 1990s. The modest reforms in the 1980s were followed by more far-reaching reforms, transforming the SBs into stateowned commercial banks (SOCBs) in 1990s, which reflected the central government’s determination of enhancing the efficiency of the state banks by separating commercial lending from policy lending. However, lending decisions were still mainly influenced by state directives instead of profitability considerations. The pressure on China’s banking sector has intensified since China’s admission into the World Trade Organization (WTO) in 2001. In response to its commitments of opening up its banking sector to foreign banks in December 2006, China has initiated reforms in various dimensions to cope with encroaching and intensifying competition for the past six years.