Impact of Financial System on Developing Countries

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Section one
Introduction
General background of the study

Examination of the role of financial system in supporting the growth of its economy and explore the directions of its future development. Almost every functioning financial system includes financial markets and intermediaries (e.g., a banking sector), but how these two sectors contribute to the entire financial system and economy differs significantly across different countries. Although there is no consensus regarding the prospects of China’s future economic growth, a prevailing view on China’s financial system speculates that it is one of the weakest links in the economy and it will hamper future economic growth. A comprehensive examination of all aspects of China’s financial system, and extensive comparisons with other countries where data is available are provided below. We also discuss briefly what has worked and what remains to be done within the financial system, and examine how further development can better serve the entire economy. Drawing four main conclusions about China’s financial system and its future development. First, examination and compare China’s banking system and financial markets with those of both developed and emerging countries, and the findings that China’s financial system is dominated by a large but under-developed banking system, which is mainly controlled by the four largest state-owned banks with a large amount of non-performing loans (NPLs). The continuing effort of improving the banking system, in particular, reducing the amount of NPLs of the major banks to normal levels, is the most important aspect of reforming China’s financial system in the short run. We also highlighted the trend of macroeconomic indicator in China. And in conclusion, the review of growth in china and its financial system . However, their scale and importance are not comparable to the banking sector for the entire economy. Moreover, the financial markets have not been effective in allocating resources in the economy, in that they are highly speculative and driven by insider trading. Going forward, financial markets are likely to play an increasingly important role in the economy, and the further development of the financial markets is the most important long-term objective for China’s financial system. In other words, it is pertinent to state specifically, that the regulatory environment should be improved; in particular, corporate and trading laws and legal protection of investors, as well as institutions governing the enforcement of contracts should be further developed. Second, the large blocks of shares held by various government entities in listed companies (including state-owned banks) should be reduced by announcing and carrying out a plan to sell them off slowly over time. Third, more professionals such as accountants, investment bankers, and (business) lawyers, should be trained. Fourth, domestic financial intermediaries that act as institutional investors should be encouraged, as they will play a critical role in improving the efficiency of the markets and strengthening the corporate governance of listed firms. Finally, new financial products and markets should be developed. Third, in a companion paper (Allen, Qian, and Qian, 2005), it is stated that the most successful part of the financial system, in terms of supporting the growth of the overall economy, is not the banking sector or stock market, but rather a sector of alternative financing channels, such as internal financing and trade credits, and coalitions of various forms among firms, investors, and local governments. Many of these financing channels rely on alternative governance mechanisms, such as competition in product and input markets, and trust, reputation, and relationships. Together these methods of financing and governance have supported the growth of a “Hybrid Sector” of non-state, non-listed firms with various types of ownership structures. It is important to point out at the...
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