| Economic liberalization has occurred at a rapid pace in China since the start of economic reforms in 1978. One sector that has lagged behind when it comes to liberalization, however, is that of the banking and finance sector. The lack of liberalization, and more generally, structural reform in China's banking system is due to its irreplaceable role as financier of the national economy. With no alternative forms of financing, state-led economic development in China has consistently been dependent on bank lending. In particular, large state-owned enterprises (SOEs) are the entities that have benefited most from government-mandated preferential lending policies.;This critical role of financial support has extended beyond the domestic realm in recent years to include assisting enterprises in their outbound foreign direct investment (OFDI). As China's general OFDI increases, so has finance sector-specific OFDI. Finance sector-specific OFDI theoretically can assist in the reform process for China's state-owned banks, but this does not seem to be a primary motivation for banks to invest abroad. Rather, finance sector OFDI indicates an extension of banks supporting state-owned and large enterprises abroad. This project makes the argument that this added imperative role will provide even less of an incentive for policymakers to mandate desperately needed reforms, to the detriment of the banking system. |
