| By: |
Beoy Kui Ng (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore) |
| Abstract: |
China has been delaying its adoption of a flexible exchange rate system with
free capital flows. The main excuse is that its financial sector is still in
its fragile stage and is not able to withstand any external shocks. A big bang
approach towards such liberalization will only lead to financial crisis as
observed by experiences of many Asia-Pacific countries during the Asian
Financial Crisis. With this in mind, this paper attempts to uncover the
approach and strategies adopted by China in its banking reform since 1978 and
then assess these reform measures in macroeconomic perspective. The paper
argues that since China is still lingering on export-oriented strategy in
promoting economic growth and monetary independence for demand management is
still a long way to go, it is still in China’s best interest not to adopt a
flexible exchange rate system at this point of time. As to capital account
liberalization, the main focus is to engineer a controlled and systematic
capital outflows through outward investment in particular portfolio
investment. At the micro level, China should continue its banking reforms
until the financial sector is strong enough to withstand the severe pressure
of globalization. By then, will China, with its matured financial system be
ready to consider the adoption of a flexible exchange system with free capital
flows. |
| Keywords: |
China, banking reform, non-performing loans, state-owned enterprises, corporate governance, regulation and supervision, financial liberalization |
| JEL: |
E44 E5 G2 O16 O5 |
| Date: |
2007–07 |
| URL: |
http://d.repec.org/n?u=RePEc:nan:wpaper:0707&r=fdg |