Review of China Financial System

China financial system design is reviewed. Past academic and non- academic publish material is perused to formed an understanding of the present financial system. Discussion and recommendation suggested to strengthen the present reform of financial system.


Introduction
While some report on China's financial system reform had been objective, there had been overly pessimistic reports in the past (Lardy, 1998;Chang, 2001).The reform of China's financial system has been gradual and cautious (Chow, 2011;Lin 2012) and as shown in Figure 1, after a period of fast economic growth, the economy will take a breather before moving north again.
Some research had suggested that instead of following the Anglo-Saxon market based model with widely held equity and an active market for corporate control China should adopt the German bank based financial system with a stable core of majorityequity owners exercising directly control on management. (Corbett and Mayer 1992;Mayhew and Seabright, 1993).
At the moment China is going through a period of consolidation. (Walter & Howie, 2011;Mansharamani, 2011;World Bank, 2012) had voiced their concern as to the sustainability of China rapid economic growth.There is a growing consensus that China's banking remains woefully dysfunctional despite almost 40years of reforms (Goodstadt, 2012). But, China's financial system has undergone tremendous and constant structural changes since 1979 (Bell and Chao,2010).
According to (World Bank, 2012) report, China should complete its transition to a market economy through fiscal and financial sector reforms.

Edmund Phelps from Columbia University said that
China needed a brand new financial system that is not tied up to local government and therefore more flexible and able to respond to opportunities and demand of businesses.
The lack of a well-functioning financial system is one of the main weaknesses of transition and former centrally planned economies (Grosffffd Electronic copy available at: http://ssrn.com/abstract=2703251  Levine, 1993 a, b;North, 1990;Levine, 2002;Neal, 1990;Rousseau and Sylla, 2003;Goodstadt, 2012) and (Song and Thakor, 2012) discovered strong evidence that the development of financial market correspond positively to economic growth. (Merton and Bodie, 2005), concluded that the design and implementation of a well-functioning financial system promote long-term economic growth. China's longer-term economic goal involves moving to a more sustainable growth model appropriate for a maturing economy and one that is more innovative and less resource-intensive.
It takes some macroeconomic rebalancing from foreign to domestic demand, of which the gradual shift from investment to consumption within domestic demand.
China may seems to be insulated from external markets does not mean it is crisis proof and from The (World Bank,2012) reported that China's growth is in danger of decelerating rapidly and without warning. When calling for financial reform, the critics meant an ideal financial system.
The question is what is the design of a wellfunctioning financial system?
Unfortunately it does not exist as highlighted by (Allen, 1999)  implementation. In chapter 4 we take a look at the present financial system of china, chapter is discussion on what need to be reformed, in chapter 6, we provide our recommendation and chapter 7 is conclusion.

Definition and purpose of a financial system
The financial system allows the transfer of money between savers (and investors) and borrowers (Sullivan & Sheffrin, 2003 The key to financial system design is to unders tand the goals of the economy as a whole and to explore howdifferent combinations of pieces of the system can best achieve those goals (Kaufman and Kroszner, 1997).The primary purpose of the financial system is to bridge the space between the savers and the investors. According to (Merton and Bodie, 2005), a good financial system is displayed in the quality of five key financial functions: China to move forward. In the next chapter we analyse the previous reform to the financial system and decide if they hd achieved the goal set out previously.

Literature Review
There are two important branches in the literature that studies financial system of a country (Allen,1999). One investigates the relationship between the legal environment and the financial system which was pioneered by (Laporta, Lopezde-Silanes, Shleifer, and Vishny, 1997;1998) and the second is concerned with the relationshipbetween financial systems and economic growth (King and Levine, 1993a;1993b;Levine, 1999 all loans (Lardy, 1998). Various other authors had perform studies on this area. The financial system has undergone on-going reformed since then.
Currently the present financial system is best described by (Allen, Qian, Zhang & Zhao, 2012).
China's financial system is one of the weakest links in the economy and it will affect future economic growth.World Bank (2012)  b. To provide more information to users of financial system. Grosfeld (1994)

Conclusion
While China acknowledges it has to reform its present financial system, it is cautious not to "throw the baby with the bath water". The Western financial system model is far from perfect and as (Allen & Qian, 2009) argued that some criticism from the West may not be valid for example China may not have strong rule of law but this did not hinder its financial system and development. As we witness in the USA, the formal creation of law is a long and tedious process and in a fast moving economy such law may become obsolete by the time it is passed by formal channel. Perhaps it is best to rely on common sense and judges to quickly resolve the conflict.
On the other hand there are areas such as the development of an efficient stock market which will affect the real economy if no reform is undertaken. China does not have many channels for savers to invest in and therefore over supply of savings caused bubble to appear in the limited investment vehicle such as real estate and the stock market. This is a valid issue must be address by the financial system reform. China so far and therefore reform must be carried out patiently so that it will not cause great shock to the overall economy.