Development Finance

The Chinese banking system remained resilient during the 2007 global financial crisis because of three factors: (1) capital-control policies have limited its exposure to international capital and credit markets; (2) it is focused on traditional banking rather than securitization activities; and (3) it is dominated by state-owned banks that avail themselves of public trust. Although China's state-owned banks are often criticized for lending primarily to state-owned enterprises, this article argues that through credit generation, Chinese banks help to produce a Schumpeterian-Keynesian credit-investment-income-creation process that has led to the country's decades of fast growth. Given that credit creation is not constrained by prior savings, lending to state-owned enterprises need not be reduced in order to increase lending to private enterprises. The article concludes by examining three main challenges facing Chinese banks.