A Comparative Study of Market-Dominated and Bank-Dominated Financial Systems in China

Author: Wu Xiaoqiu, Zhao Xijun, Qu Qiang
Publisher:
Publish Date: 2006-05-25
Features: Although China's financial system reform has been underway for over 20 years, one question has us: What is the strategic goal of China's financial system? Should it establish a market-based financial system (with the core being the capital market, i.e., a market-dominated financial system), or continue maintaining the existing bank-dominated financial system? Or is there a third way? Based on comparative research, this book explores this issue in a new way. The authors argue that the functions of finance will continuously evolve as the financial structure is upgraded, and the core functions of finance are not fixed. A modern financial system must not only maintain sufficient liquidity to promote sustained economic growth through the optimal allocation of stock and flow resources, but also have the function of maximizing the diversification of risks accumulated from economic growth. Additionally, it may need to provide residents and investors with the wealth effect of economic growth, meaning it must reserve and promote the growth of financial assets at a rate no slower than the economic growth rate. Such a financial system may have many structural elements, but a developed capital market is its core element. The authors further argue that in the design of China's financial system, a developed capital market with good liquidity is its most important strategic element, and a market-dominated financial system should be the strategic model for China's financial system. Although China's financial system reform has been underway for over 20 years, one question has us: What is the strategic goal of China's financial system? Should it establish a market-based financial system (with the core being the capital market, i.e., a market-dominated financial system), or continue maintaining the existing bank-dominated financial system? Or is there a third way? Based on comparative research, this book explores this issue in a new way. The authors argue that the functions of finance will continuously evolve as the financial structure is upgraded, and the core functions of finance are not fixed. A modern financial system must not only maintain sufficient liquidity to promote sustained economic growth through the optimal allocation of stock and flow resources, but also have the function of maximizing the diversification of risks accumulated from economic growth. Additionally, it may need to provide residents and investors with the wealth effect of economic growth, meaning it must reserve and promote the growth of financial assets at a rate no slower than the economic growth rate. Such a financial system may have many structural elements, but a developed capital market is its core element. The authors further argue that in the design of China's financial system, a developed capital market with good liquidity is its most important strategic element, and a market-dominated financial system should be the strategic model for China's financial system.