INTRODUCTION

We examine the role of China's financial system in supporting the growth of its economy and explore the directions of its future development. Almost every functioning financial system includes financial markets and intermediaries (e.g., a banking sector), but how these two sectors contribute to the entire financial system and economy differs significantly across different countries. Although there is no consensus regarding the prospects for China's future economic growth, a prevailing view on China's financial system speculates that it is one of the weakest links in the economy and it will hamper future economic growth.

A comprehensive examination of all aspects of China's financial system and extensive comparisons with other countries where data are available are provided in this chapter. We also discuss what has worked and what remains to be done within the financial system and examine how further development can better serve the entire economy. Finally, we provide guidelines for future research and policymaking on several important unresolved issues, including how China's financial system should integrate into the world's markets and economy.

We draw four main conclusions about China's financial system and its future development. First, when we examine and compare China's banking system and financial markets with those of both developed and emerging countries, we find that China's financial system is currently dominated by a large but underdeveloped banking system.