The Challenge of Bank Restructuring in China

This paper focuses on several aspects of China's bank restructuring and recapitalization program, saying that China's leadership faces a substantial challenge in recapitalizing its financial system. Specifically, it looks at its timing, size and fiscal implications. Using quantitative data, the paper states that a successful bank restructuring program will require a substantially strengthened central bank that can exercise effective supervision and prudential regulation of banks, arguing that one critical step in improving the efficiency of resource allocation and use in China is the creation of a modern, commercially oriented banking system. 

The paper considers the need to increase competition in the financial system and overhaul the taxation of banks. Exploring the performance of the financial sector in China, it says that although it is less well known, some of the banks, as well as a broad range of non-bank financial institutions, are extraordinarily weak. It concludes that:

• Banks heavily dominate China's existing financial system and the eventual development of capital markets depends critically on a financially healthy, commercially oriented banking system;
• Creating a modern financial system is essential if China is to meet the central goal of its economic reform.