China's economic reform is at a crucial moment. On the one hand, 14 years of economic reform have achieved considerable success. China's GNP grew at an average annual rate of 8.6 per cent between 1979 and 1991 and reached 12.8 per cent in 1992; exports grew even faster so that the export-GNP ratio increased from 4.7 per cent in 1978 to 19.3 per cent in 1991 and foreign reserves increased from US$1.6 billion to US$21.71 billion correspondingly (Table 16.1). Accompanying high growth, the living standards of the Chinese people have improved greatly. On the other hand, several key institutional aspects of a market system, including the fiscal system, the financial system, and the ownership and governance of enterprises, still wait for a major breakthrough before the benefits of the market can be fully realized. In October 1992 the Chinese government officially designated its reform goal as a 'socialist market economy', which opened ways for an all-round transition towards the market system. This could be an important new start.
This chapter studies financial system reforms in China with a focus on institutional restructuring. The achievements of the reforms in the financial sector in the past 14 years have been mixed: household bank deposits have risen to nearly 50 per cent of GNP; investment financing has gradually shifted from the government budget to bank loans; financial intermediaries have flourished; a nascent securities market made a quick start; and financial assets have multiplied to include choices of government, financial and enterprise bonds, as well as equity shares. However, old problems with the planning system remain and new problems have arisen: allocation of financial resources has been inefficient because credit was