Analysis

China: Banking Reforms Critical to Avoiding a New Financial Crisis
A branch of the Industrial and Commercial Bank of China (ICBC) a Chinese state-owned bank that is the world's largest bank by market capitalization. ( FREDERIC J. BROWN/AFP/Getty Images)
February 9, 2012
| Economics
| Asia and the Pacific
Summary
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While the IMF this week predicted an 8.2 percent growth rate this year for China, it also assessed that China’s growth could drop four more percentage points if Europe’s economic crisis worsens and causes large declines in credit and output. Such a development would be devastating to the Chinese economy. To avoid such a crisis, China must undertake fundamental reforms of its state-controlled banking sector and may also need to implement a large economic stimulus.

Chinese banks are still often used by the government to serve political and social goals by funneling money to local governments and state-owned enterprises in unprofitable sectors.  These political and social imperatives placed on banks need to end if China’s economy is to remain a strong engine of growth.

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