Shifting funding to more productive borrowers and away from less productive state-owned enterprises (SOEs) would stimulate job creation and increase tax revenues to fund social programmes for those laid off by SOEs - so relieving rather than exacerbating social tensions in the long term.
Better capital allocation would also create higher returns on savings, allowing Chinese households to save less and consume more. Political pressures do influence lending practices - for example, to support big local SOE employers - but Chinese banks are also weak in loan pricing and risk management. Mainland equity and debt markets are held back by over-regulation and are used overwhelmingly by SOEs. Chinese companies need these markets to develop to provide competition to banks and give funding choice.
Putting China's capital to work
Diana Farrell and Susan Lund, Far Eastern Economic Review, Vol 169 No 4, May 2006.
Reviewed by Steve Lodge.