Financial Sector Reform in China

This paper presents the characteristics of China's financial system and posits policy design questions to make China's financial sector more responsive to the economic needs of firms and the social needs of the society. The paper presents the following three approaches to understanding the role of financial institutions:

• Financial deepening hinges on the ability of the State to make credible commitments;
• Agency relationships and information asymmetries affect interactions between lenders and borrowers in financial markets;
• Financial sector development depends on the ability of the State to enforce commitments between members of civil society and the Government.

The authors present various analyses in the paper. These include:

• The cause of the problems in China's financial sector are the pervasive controls of the Government;
• The country lacks the institutional and regulatory foundation necessary for financial markets;
• The underdevelopment of China's fiscal capacity hinders the functioning of its financial system;
• The stagnation of the rural industrial economy is due to inadequate financial intermediation;
• Economic changes have brought about changes in the rural health sector;
• The responsibility for local governments to fund services such as healthcare has led to uneven provision across China;
• There is tension between financial reforms and social performance.

The paper concludes by suggesting a number of solutions and approaches for future research.