ABSTRACT
Market oriented reforms have created remarkable changes in the Chinese economy. In many ways, China is moving away from a centrally-planned economy to a more market-oriented economy. However, the transformation of the financial sector has been delayed. The banking system is still dominated by the four state-owned commercial banks, which channel funds to finance state-owned enterprises, many of them are loss-makers. This suggests that resources are misallocated thought the financial sector. Financial sector reform is therefore crucial for improving the efficiency in resource allocation and productivity growth, which are needed in sustaining high rate of growth. However, financial sector reform has been slow and difficult to proceed, primarily due to difficulties in restructuring the state enterprise sector. State enterprise reform is difficult to because it results in large number of layoffs of state workers, which may cause social instability without a well-funded social welfare system.
