BPEA | Fall 2006

The Contradiction in China’s Gradualist Banking Reforms

Anil K. Kashyap and
Anil K. Kashyap University of Chicago
Wendy Dobson
Wendy Dobson University of Toronto
discussants: Lawrence H. Summers and
Lawrence H. Summers Charles W. Eliot University Professor and President Emeritus - Harvard University
Nicholas Lardy
Nicholas Lardy Anthony M. Solomon Senior Fellow, Peterson Institute for International Economics

Fall 2006

DURING CHINA’S TWO and a half decades of economic reform, it has often
been observed that the bank-dominated financial system is the economy’s
Achilles’ heel. Since 2003, China’s central government has reformed the
largest state-owned commercial banks to improve their competitiveness
before opening the banking industry to foreign competitors, as mandated as
part of the country’s accession to the World Trade Organization (WTO).
Reform of these banks has markedly improved their performance, but the
process has been gradual, and underlying problems remain.