Financial System in China Essay Example | Topics and Well Written Essays - 2500 words

Financial System in China - Essay Example The financial markets and banking system in China is indeed a vast topic and will be quiet different from developed, developing, transitional and emerging countries. The focus will be on the role of financial institutions as intermediaries for their users, which includes investors, firms and government - and not to try to construct a detailed description of the contracts and operations in which they engage and the legislation in place. China's current financial system is dominated by a big banking sector that is quite inefficient. In order to reform the Chinese financial system sooner, there has to be a drastic reduction in the number of non-performing loans amongst the major banks to a normal level. This is a vital objective for the success of any reformation. Although the growth of the stock market in China has been rapid, its role of allocation of resources has been ineffective and limited in the country's economy. Further development of China's financial markets happens to be the most important long-term object. For sustainable stable economic growth, China should strive to halt or prevent any damaging financial crises, as well as a banking sector crisis, a "twin crisis" in the currency market and banking sector and a stock market or real estate crash. THE RELATIONSHIP BETWEEN THE FINANCIAL AND CORPORATE SECTORS OF THE CHINESE ECONOMY In the financial market sector, speculation and insider information has characterized the Chinese Financial markets and has not been very successful in the effective allocation of resources as the banking sector. The Shanghai Stock Exchange (SHSE hereafter) and Shenzhen Stock Exchange (SZSE hereafter) all established in 1990, are China's two main financial markets, and have been growing at a tremendous rate. But they have not been working a rate that can bring in some improvements in the Chinese financial market sector. Is all due to encumbrances and poor regulation that characterizes the regulatory environment particularly in the corporate and trading laws, the legal protection of investors, and as well as institutions that are responsible for the governing of enforcement of contracts have all been poorly developed.The poor and ineffective functioning of these markets is also linked to the fact that a reasonable amount of large blocks of shares are held by various government entiti es in listed companies (including state-owned banks). To greatly improve the functioning of the financial market, there should be a planned reduction of these government owned entities, and that is achievable by selling them off slowly over time. Lack of trained professionals has plagued market such as investment bankers, (business) lawyers and accountants. There is lack of incentive to effectively motivate financial intermediaries who should act as institutional investors for the smooth and efficient running of the market. They are just totally unavailable especially when one considers the role they play in improving the efficiency of the markets and strengthening the corporate governance of