China’s Financial Sector: Contributions to Growth and Downside Risks

Any evaluation of China’s financial system and its prospects must concentrate on its contribution to China’s economic growth and to related solutions to a range of domestic economic goals. The evolution of China’s financial system, in all its various dimensions, is in midstream, with its many market and non-market aspects reforming simultaneously. Its hybrid nature, with aspects considered by foreign observers to be not only unconventional but inefficient, in fact appears to serve China’s current needs relatively well. The requirements for continued reform include maintenance and improvement of non-market, policy directed, components at the same time that immature market-based components struggle to overcome the considerable handicaps imposed by the human resource and institutional shortcomings of a country with GDP per capita below US 2,000 dollars. China has faced and continues to face a range of domestic economic challenges directly associated with its rapid growth and market system reforms. The most important challenges are (1) job creation to restructure China’s labor force away from low-productivity rural interior activities, (2) accelerating construction of urban infrastructure, and (3) countering the weakness of China’s tax base and other public financial resources 1 . China, starting as it has from very low levels of GDP per capita, is attempting to leap ahead into middle-income-country status in the span of only several decades. Its economic, social and political foundations are all changing and expanding at once. A cornerstone of Chinese economic and financial policy, therefore, is the requirement for China to continue to support rapid economic growth and job creation at the same time that it modernizes its financial system. In this setting, it is useful to emphasize the two-part nature of China’s financial system—a market-based competitive component and a government-directed public component.