Financial Fragility Revisited

Abstract

Despite more than twenty years of structural reforms, the stability of the Chinese banking system remains a key concern for China’s economic outlook. Many China observers are ambivalent about the health of the Chinese banks. Die-hard pessimists have argued for an eventual collapse of the banking system, dragging the economy down with it. Some others see the opening up of the banking system to fierce foreign competition under World Trade Organization (WTO) requirements aggravating China’s inherent financial woes, leading to an eventual banking implosion. There is also concern about the informal credit market, or the curb market as it is sometimes called, wreaking havoc on the formal banking system and reducing the effectiveness of monetary policy on demand management.