Chinese Financial Economic System
ChineseFinancial Economic System
Indetermining production efficiency among the Chinese government in theperiod of 1980s to 19890s, different types of data are put together,and comparison made so as to understand the performance of thebusiness (Chow,2015).To achieve this, they used calculated inputs and subtracted them fromthe final output. Among the inputs, they included labor costs, rawmaterials, expenses, the cost of energy, and information, amongothers. Total output was all the monetary value of its finalproduction.
Thereis a difference in the way managers of a large state enterprise inChina and a manager for a large private enterprise in the UnitedStates conduct their duties (Luo, 2016). Managers of the state-ownedenterprise were appointed by minister the in the specific sector.They had a political connection to those in the political leadershipof the country. These managers are usually of low education status.They are not the best in the sector since their politicallypositioned their and not the competent nature. They follow ordersfrom its seniors in politics (Luo, 2016).
Onthe other hand, private manager for a large enterprise inthe United States is a highly competent person chosen to run thebusiness for best performance of the business (Luo, 2016). Themanager has adequate skills that can propel the business to a higherstatus. The managers are not affected by politicians but rather theaims of the business that drive them. They do a thorough researchabout customers and therefore decide the creditworthiness of theclient. This enables them to avoid bad debt which makes businesses tofall.
Duringthe 1997-9 financial crisis in Asia, China had a banking crisis,which affected its functions and expectations (Berman& Haque, 2015).There are alleged reasons presumed to bring about thefinancial crisis. One of its reasons is the incompetent managers andsome of its staff. During that period, its managers were lessequipped to adequate skills to manage modern banks (Chow,2015).Its staff also had little skills thus failed to use creditworthinessof people who wanted to borrow loans from the banks. They failed toaccess the risks of projects that borrowers wanted to invest.Generally, they had little knowledge and training about banking (Luo,2016).
Themode of provision for the internal structure of incentives among itsstaff and managers served as a reason for its crisis. Elders had theduty to appoint bank managers. Managers, therefore, would approveloans easily in favor of the elders leading to the crisis. Theactivities were subject to favors from the directors. The thirdreason was rewards and the external structure of incentives to staffmembers and managers. This refers to policies and stipulations whichare made by the central bank, Chinese society, and bureaucracy (Chow,2015).If the central bank set a ceiling for interest rates, commercial bankmanagers could be made to restrict investment thus leading tofinancial crisis.
Chinawas able to overcome banking crisis that affected Asian financialsystems. It set up proactive measures which would help to solve itsfinancial crisis challenge. It took an active role in the IMForganized aid by providing donating huge amounts of money to theorganization to help in solving the crisis (Almeidaet al., 2015).It also adopted a policy that encouraged domestic growth and demand.Moreover, it participated in International Financial Cooperation tostop the crisis.
China`scommercial banks are facing institutional weaknesses that make dragsit behind hence slow or limited growth in the market. One of itsmajor institutional weaknesses is a bad-loan problem (Luo, 2016).State-owned institutions and enterprises are frustrating China`scommercial banks. These institutions fail to repay loans they borrowintentionally causing financial constraints in the banks. This leadsto decrease in GDP of a country.
Secondly,there are large amounts of bad debt brought about by the localgovernments. Research showed that by the end of 2013, localgovernments had debt that amounted to 30% of its national income(Luo, 2016). With its financial entities, local governments borrow ahuge amount of money, which they fail to pay them back in time. Theytake advantage of commercial bank`s trust and borrow as much as itcan. They invest some of the borrowed money on non-profitableprojects making it difficult to pay them back. The increase in baddebt makes the banking system unstable. Thirdly, private investorsand enterprises do not borrow loans from commercial banks to investin projects that are more profitable. In this case, misallocation offunds sets in. Local government misallocation funds thatthey borrow from the commercial banks thus affecting China’seconomic growth (Luo, 2016).
Finally,the shadow-banking system in China is a weakness to commercial banks.This is whereby the government comes in and tries to set a ceiling onthe rate of interest charged for loans borrowed and demand deposits(Chow,2015).Depositors usually demand higher interest rates and thereforeregulated interest rates scare them away. Setting up ceilings oninterest rates paid to depositors leads to decrease in loanablefunds.
Almeida,H., KIM, C. S., & Kim, H. B. (2015). Internal capital markets inbusiness groups: Evidence from the Asian financial crisis. TheJournal of Finance,70(6), 2539-2586.
Berman,E., & Haque, M. S. (2015). Asianleadership in policy and governance. Bingley, UK: Emerald Group Publishing Limited.
Chow,G. C. (2015). China`seconomic transformation.Hoboken:Wiley-Blackwell.
Luo,D. (2016). TheDevelopment of the Chinese Financial System and Reform of ChineseCommercial Banks.New York: Palgrave Macmillan.
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