Chinese banking development is crippled by the persistent NPL.

What is it about?

This research deals with two important issues. First, why the formal banking system of China remains grossly underdeveloped. Second, it aims to explain a paradox: in the absent of a developed financial system, how China accelerates its economic growth. Analyzing data from 1977 to 2005, the research shows that in the early years, banks' net rent was negative which means that they were financially repressed may be to achieve other socio-political objectives of the state. We have also shown that the formal financial system is superseded by the informal one especially for financing private enterprises which are playing a crucial role for accelerating Chinese economic growth. As a consequence, bank’s malaise performance did not have excessive debilitating effects on economic progress. The paper concludes stating that lack of prompt and rigorous action from Chinese government to redress the ongoing banking mess may halt the pace of economic growth in the near future.

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Why is it important?

The rapid economic growth of Chinese economy has heralded lots of critical questions and paradoxes for scholars and analysts worldwide throughout its course of successful journey. Explanations of these paradoxes are essential to recommend policy prescriptions so that China can find a soft landing economic ground when its growth is normalized and second, developing countries can follow the path shown by China for their economic development.

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