Document Type

Master's Culminating Experience

Publication Date



The purpose of this research is to study the banking sector reform in China, its problems, its current situation, and its future direction. The banking system is at the heart of reforms which China is attempting to initiate the future consolidation of rapid economic growth initiated in the 1980s. The need for wide-ranging reform both of the monetary policy and of the state banking system is due to the excesses of the 1980s expansionary phase. As the channels of financing and o f credit allocation has become somewhat obsolete compared to reforms in the real sector o f the economy, the direction of the current banking sector reform become particularly crucial for China’s sustainable economic growth in the next century. This paper studies China’s banking sector both before and after its economic reform. Firstly, an institutional analysis approach is used to illustrate obstacles and breakthroughs in China’s banking sector reform. Then an econometric approach is used to study money demand models in China. The econometric study is primarily based on the Keynesian Theory and the Modern Quantity Theory. It also has some interesting findings beyond those from the institutional analysis.

From this research, three policy implications for reforms in China are given. These are: monetary discipline, proper growth rate of money supply, and market transparency. This paper proposes that in order to have a properly designed banking system, China should incorporate both the western countries’ models and the uniqueness of the Chinese economy in its banking sector reform to facilitate sustainable economic growth.