Financial Reform and Transition in China: A Study of the Evolution of Banks in Rural, Coastal Areas

This paper seeks to understand the evolution of financial intermediation in the course of China’s economic transition. The research is based on a unique data set collected by the authors and other collaborators from a 1998 survey of financial institutions, enterprises, and government officials in southern China. Based on an empirical investigation of rural financial reforms, we argue that China’s two-decade long financial reform was a gradual process that accommodates reforms in other sectors and responds to changing policy goals and the economic and institutional environment in which financial institutions operate. Although using standard measures of financial system performance may cast doubt on the effectiveness of China’s rural banking system, when one understands the different roles that it has been asked to play it can be argued that it has not operated so poorly. But, China’s rural economic environment is still changing. If the system continues to change in the future, responding to pressures in the economy, further financial reforms will almost certainly emerge in the coming years.