ABSTRACT
China’s planners have traditionally used the banking system as an extension of economic planning and hence a tool for the attainment of national economic goals and objectives. During the central planning era until the late 1970s, the banking system handed out loans to SOEs without little regard to profitability or repayment capacity. In fact many of these loans were merely regarded as disbursements and were never repaid and many enterprises were kept afloat for socio-economic reasons, such as maintaining high employment and preventing social unrest. Other reasons were strategic, such as keeping loss-making military industrial enterprises afloat. The soft budget constraint (Kornai 1986) was in constant usage. From the late 1980s onwards, the banking system was slowly reformed to be more commercial and profit oriented but still retained many of its old failings with the SOCBs still being instructed to direct their lending to often bankrupt SOEs regardless of creditworthiness.
