Perhaps one of the most perplexing issues to haunt China’s political economy has been the fact that rapid economic growth has been achieved on the back of a fragile banking and financial system. It is also perplexing that non-performing loans (NPLs) in the main state-owned banks continue to mount despite significant banking reforms in the 1990s and 2000s in terms of national legislation, corporate governance, prudential regulation, and external competition.

On the one hand, banking and finance is seen by many as a fiercely contested arena of competing factions within the ruling Communist Party, with the banking and financial system seen as no more than an ATM for the state sector and a white glove for the Party to sustain its mostly corrupt regime; so much so that the chronic accumulation of debt is now seen as a structural feature in China’s political economy. On the other hand, some commentators have emphasized that a transformation of the banking system has been underway in the last decade in which the more efficient private sector has enjoyed expanded access to credit. From this perspective, if well managed, it has been argued that it may be possible for China to ‘muddle through’ the various traps and sustain a reformed banking system and slower but healthier economic growth model.

Please click here to read the full “Banking on growth models” article in China Policy Institute by Griffith Asia Institute Senior Research Fellow, Dr. Hui (Steven) Feng.