China's Banking Reform and Hidden Risk

Spurred by the Asian crises in the 1990s, China began overhauling its banking system, to a great extent, to replicate the U.S. banking system. Given the recent meltdown of the U.S. banking system and the global contagion, it is noteworthy to evaluate the safety of China's banking system. This paper analyzes the current status of the three main state-owned commercial banks and discusses the hidden threats to China's financial stability. Panel-data logistic analysis is used to evaluate the probability of a potential banking failure. The results indicate that the Chinese banks have benefited through the disposal of the non-performing loans and from fresh capital injections. However, the bad debt problem, growing competition from foreign banks, as well as heavy government involvement, pose potential threats.