Banking Reforms and Monetary Policy in the People's Republic of China: Is the Chinese Central Banking System Ready for Joining the WTO? (review)

The successful economic reforms implemented in China since 1978 has gained tremendous international attention. The latest statistics and estimates show that by the end of 2002 China's nominal GDP per capita has reached one thousand dollars—and this number may actually have surpassed four thousand if calculated by the Purchasing Power Parity (PPP) method. However, neither did this economic achievement happen overnight nor has the benefit been distributed equally across the country. Inequality and unbalance are pervasive across regions, occupations, industries, and economic sectors.

Before 1978, China's was one of a few centrally planned economies. Agricultural production was organized collectively as communes. Industrial production was mainly carried out by state-owned enterprises, which formed the backbone of the national economy. Urban collectives played only supplemental roles, while private, individual, and foreign enterprises were almost nonexistent. State-owned enterprises followed central government production plans instead of market demand. Their capital investments, wage allowances, and even personnel placements were allocated directly from the central planner. They simply carried out the designated production plan and turned over all of the output and profits. All expenses were covered by central plans as well, including possible economic losses. Raised in this kind of environment, state-owned enterprises were not used to market competition. Workers in such enterprises were said to have "iron rice bowls," which meant that they had the security of lifetime jobs and benefits.

Besides the industrial sector, several service sectors were also dominated by state-owned enterprises—for example, the banking and telecommunications sectors. The 1978 reforms started with the agricultural sector by dismantling the commune system and instituting a return to family farming (i.e, the household responsibility system). Most scholars agree that urban industrial reform picked up in the mid-1980s, when a large number of non-state enterprises became dominant market forces. Some scholars believe that currently the non-state component accounts for more than 50 percent of China's national economy.

However, the financial sector is one of the last fortresses of the state-run economy. The four largest state-owned banks still control more than 75 percent of total deposits and loans. Despite a tremendous effort from the central government to make them "commercial" banks, they are far from operating like regular commercial banks. Banking reform has become imperative, and the inefficient banking sector has become a bottleneck that impedes further economic growth.

Moreover, in compliance with the World Trade Organization (WTO) agreement, China's financial market will soon be opened to both domestic and foreign competition. Time is running out for the state-owned banks to adapt and brace for the coming challenges.

This volume is one of only a few studies that are devoted solely to this particular topic. There are any number of books on China's economic development, but most of them do not provide such a thorough, complete, and up-to-date view of this issue. The topic is a narrow but important one, and the author has done a good job covering it—and has provided a useful text for introductory courses on China's financial system as well.

A general-to-specific-approach has been adopted in the arrangement of the contents. After a brief introduction, the next four chapters discuss the evolution of the system by period, in chronological order: (1) the period before 1978, when socialist central banking predominated; (2) 1978-1992, the period of structural change in the banking system, that is, when commercial banking was separated from central banking; (3) 1993-1997, the years when the central bank began to function actively, for example in stimulating growth and controlling inflation; and (4) 1998-2001, the period of the Asian financial crisis and new challenges. Chapter 5 focuses on the impact of accession to the...