ABSTRACT
The greatest source of macroeconomic instability in China is its weak financial system. 1 This linkage is evident at several levels. Macroeconomic fluctuations over the past two decades have been quite marked, in part because a weak financial system has constrained the development of effective monetary policy instruments. Second, China is currently extremely vulnerable to an economic slowdown that could place significant pressure on its banking system. Finally, the rapid build up of bank credit and a significant deterioration of loan quality creates the possibility of a financial meltdown.
