chapter  5
23 Pages

Insufficient competition, implicit guarantee and financial inefficiency

ByChangwen Zhao, Hongming Zhu

Chapter 5 explores the reasons why China’s financial system is inefficient. We find the main reason at the financial level is insufficient competition. Insufficient competition involves three levels: within the banking system; between/among banks and the capital market; and between/among banks and non-bank financial institutions. The main reason at the non-financial level is the implicit guarantee given by the Chinese government to industrial SOEs, local government financing vehicles and the real estate sector.