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Sequencing Banking Sector Reforms in the People ’ s Republic of China after the WTO : Options and Strategies

The decline of the state’s fiscal resources in the People's Republic of China (PRC) foresees the inevitability of the state’s withdrawal from the production side of the economy. The state would thus have to exchange its ownership and control for financial resources from the nonstate sector in order to establish a social safety net for the purpose of social stability. The same predicament also applies to the banking sector. The state would also have to exchange its ownership to fund NPL resolution and re-capitalization of the state-owned banking sector. Fiscal and monetary disciplines combined with well-sequenced domestic financial liberalization are necessary conditions for successful NPL restructuring and domestic financial liberalization. In addition, an appropriate exchange rate regime after the WTO is needed for the purpose of managing capital flows. Financial service liberalization would accelerate the convertibility of the capital account, as capital controls are becoming ineffective as a result of the PRC’s deeper integration into the global financial market. Before the opening of the capital account, minimum institutions and comprehensive sequencing framework are needed to be in place. However, whether the PRC can succeed in its banking sector restructuring hinges on the leadership’s political will on ownership diversification.