The Heart of Economic Reform: China's Banking Reform and State Enterprise Restructuring

Article excerpt

The Heart of Economic Reform: China's Banking Reform and State Enterprise Restructuring, by Donald D. Tong. Hampshire, UK: Ashgate, 2002. xv + 202 pp. £39.95 (hardcover).

The Heart of Economic Reform attempts to provide a holistic view of China's 'unfinished' economic reforms. It seeks to link the potential success of the muchdebated financial-sector reforms to those of the state-owned enterprises (SOEs), which in turn hinge on the establishment of a functioning social welfare system. Its contribution lies in the fact that these issues are often treated separately. It is a useful source for those who wish to gain an overview of these topics, though the strengths of the arguments are sometimes weakened by less-than-perfect editing.

Donald Tong describes the critical roles of the financial sector in mobilizing savings and channelling funds from savers to investors. Since the onset of economic reforms in 1978, rural and urban households have replaced the government as the main saver and provider of capital for investment. A high savings rate is therefore important in sustaining high growth, which highlights the banks' role in providing sufficiently attractive rates of returns to savers.

China's banking sector is still dominated by the four state-owned commercial banks, which are major absorbers of household savings, but they are highly controlled by the government and their funds are invested mostly in stateowned enterprises and public projects. Though the establishment of special policy banks in 1999 relieved the four banks of some of this lending, they are still expected to finance the loss-making SOEs, and non-state enterprises are frequently discriminated against in credit provision. Partially offsetting this, a number of non-state commercial banks emerged during the 1990s-such as the Guangdong Development Bank and the Bank of Communications-as a result of increasing credit demand from the rapidly growing non-state sector alongside a desire by local governments to finance local development. However, the size of the non-state bank sector is still small, and its assets accounted for only eight percent of the total as of 1996.

Rural and urban credit cooperatives, along with trust and investment companies, have also characterized China's financial development. The credit cooperatives have been significant in collecting savings from rural and urban households and in channelling them to the development of the village and township enterprises and to the urban non-state sector, while the trust and investment companies, which are affiliated either with provincial governments or with the state banks, have emerged in recent decades as a result of increasing demands for financial services that the state-owned commercial banks could not fulfil. Overall, these several types of non-bank financial institutions are still dwarfed by the state banks: the combined assets of the former constituted only one-fifth of the assets of all financial institutions. …