A Retrospect on China's Banking Reform

China's banking system has undergone substantial changes in the past two decades, and it has been transformed from an institutional setup for central planning to a banking system in a market-oriented economy. The reform strategy is consistent with the overall economic reform in China, which, unlike many transitional economies in Eastern Europe, has taken a gradual or incremental approach. This approach enables the banks in China to progress in phases from the accounting units of the central planner to a modern commercial banking system consistent with the price system which aims at efficient allocation of financial resources. The first phase of the reform (1978-92) created a banking system that was oriented to a market economy but imprinted with the legacy of central planning. The second phase of reform (1992-present) has removed the remnants of central planning and established a full-fledged modern banking system. The purpose of this paper is to delineate the banking reform's gradual approach, with the focus on the achievements and problems of each stage.