PROBLEMS FACED BY CHINA IN THE SERVICE SECTOR

abhishreshthaa

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PROBLEMS FACED BY CHINA IN THE SERVICE SECTOR:


In China, banks continue to be keen on providing support to larger players and are playing a relatively small role in financing the private firms who are rewriting its history.


While its banking system made good progress in divorcing itself from interference by government, it still has a long way to go. There is evidence that the government still encourages lending to ailing State Enterprises. Again one gets to see the same moral hazard that is omnipresent. Banks still don't consider bad loans given to State Enterprises a serious problem.



At the basic level the problems are similar to those faced by any banking system that grows under the socialist legacy. Competition is very much limited. Profit motive is largely absent. The state ownership of banks and private ownership of business is big mismatch. Unless banks are also privatized, they are unlikely to develop profit motive.


the banking sector needs to be opened up for foreign competition and foreign ownership. Deregulation of interest rates will be another area of big change. The change is already visible with many banks gearing up for listing of their shares.


The state-owned banks saddled with about $150 bn of NPAs are considered technically bankrupt. Though the bad debts have been transferred to AMCs, it merely transfers the burden from one to another. The bottom line is that the system has to bear the cost of these NPAs.


With lack of alternative avenues of investment in the market place, banks are still flush with deposits and the state guarantee is also construed as risk free investment. The need of the hour is to totally liberate the banking system .
 
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