2.3 economy. The Chinese reforms targeting off-balance-sheet items

2.3 Challenges of financial reform in China 

   Although the reforms have brought about many big
achivements, these steps have contributed to rising risks in the financial
sector. First of significant challenge concerns corporate governance of the
financial institutions. The Chinese financial system looks like quite modern
and huge but it is still less effective., since this sector is controlled by
the government or subject government invention. The Chairmen and President of
commercial banks are oppointed by the Organization Department of the Party’s
Central Committee- the most powerful party in China. So many important
decisions are often made by the Party’s Central Committee, not CEO of the listed
banks. This is reason why pocilities have been effective in China, but in
international market it may not be impressive.

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  The second type of risk is related to banking
system. Banking system reform is known as the ” stock” problem and the “flow”
problem, where the stock problems refers to stock of bad loan and the flow
problem. The people’s Banking China reported in its third-quarter review of
monetary policy a slew ragulations for China’s shadow banking industry. Shadow
banking associated with financial products, called ” off-balance-sheet asset”.
The off-balance-sheet asset made China has faced a possible debt crisis, which
also related to the real estate industry – an industry that play a significant
role in the Chinese economy. The Chinese reforms targeting off-balance-sheet
items stem from the fear the sluggish estate market could cause widenspread
economic stag nation or even a financial crisis.

   The additional challenge involves weakening
capital account controls and the likely results. Even though the government
still keep strict control flows in a number of areas controlling has been faded
gradually by casual observations. One of good examples is hot money inflows.
However, domestic financial institutions, capital allocation, interest rate and
exchange rates are associated with current problems. For instance, total
deposits of the Chinese banking system are already 200 percent of GDP ( World
Bank 2017) and damaging changes in banks and exchange rates result from sudden
weakening of limitation on capital outflows.

   And the final type of risks is associated
with efficiency of capital allocation by the financial system. Currently state
owned enterprises (SOEs) of China account for less than one third of the
economy. China has approximately 150,000 SOEs, of which around 50,000 ( 33
percent) are owned by the central government and the remainder by local
governments ( the State Department’s Office of Investment Affairs’ Investment
Climate Statement) but they still took away more than twice of the funds raised
from indirect (banks) and direct ( capital markets) financing stations. There is
no doubt that the small and medium-sized private companies are the most essential
motivation of Chinese growth, such pattern of finance exposes difficulties both
growth of maintainance and asset quality.