ABSTRACT
State-owned commercial banks in China have been notorious for their low efficiency, mounting non-performing loans (NPLs) and loss-making. China’s bank reforms have lagged far behind reforms in the real economic sectors for two reasons. First, the banking industry has been overwhelmingly dominated by state ownership and enjoyed immense monopolistic power. Second, state commercial banks have enjoyed a significant leverage of soft budget constraints because they are frequently entrusted or coerced by local authorities to provide policy lending or to help rescue insolvent state-owned industrial enterprises. Slow banking reform, however, has been a critical constraint on China in sustaining its economic growth. Gradually, the government has had to address this issue by launching a comprehensive reform programme to make the banking system competitive and efficient to support the fast development of the real economy, which has, for almost three decades now, been growing at nearly 10 per cent per year.
