Executive SummaryThis paper analyzes the financial reform in China, given the characteristics of the transition economy. The Chinese financial system has certain characteristics including an overly rapid expansion of credit, a bank-dominated financial system, weak central bank regulation and supervision of commercial banks, and a massive buildup of non-performing loans (NPLs). The Chinese financial sector has accumulated a huge number of NPLs. This is because i) banks are in charge of state projects in place of the fiscal system, and ii) financial institutions give loans to money-losing enterprises. China needs a coordinated reform of its financial, enterprise, and fiscal systems. (The rest is omitted.)

Contents

Executive Summary
I. Introduction
II. Weakness of Chinese Financial Institutions
1. The Growth of Loans
2. Policy Lending of the Central Bank
3. Increase in Non-performing Loans
III. Policy Issues in Dealing with NPLs
1. Dealing with NPLs
2. Estimation of the Cost of Recapitalization
IV. Reform Policy for Preventing New Bad Loans
1. Independence of the People's Bank of China
2. Enhancing the Commercial Orientation of Banks
V. Concluding Remarks
References