The World Bank castigated the world's second-largest economy, China, over the nation's extensive interference in the financial system on Wednesday. In the 39-page report, the international financial institution criticized the Chinese government for undermining its own efforts at developing a stable financial structure.
In its China economic update, World Bank embraced the slackening in Asia's impressive economy after showing the growth model was changing for the better. However, the bank was unimpressed with the country's extent of state intervention, saying China has no match in modern market economies, The Fiscal Times reported.
"The state has interfered extensively and directly in allocating resources through administrative and price controls, guarantees, credit guidelines, pervasive ownership of financial institutions, and regulatory policies," the World Bank said.
The World Bank also added that the corrupt role of the state is the key factor that affects China's fragile financial sector, which the bank described as "unbalanced, repressed, costly to maintain and potentially unstable." The bank also reiterated its call for China to urgently embark on "fundamental reform" as excess capacity, debt levels and financial distress escalate in the country, Reuters has learned.
Meanwhile, as the World Bank calls on China for a vital improvement on its state-dominated financial structure, the communist administration also needs to boost its effort in addressing wasteful investments, over-indebtedness and weak regulation of its shadow banking system. Because failure to resolve these issues could divert the nation's economic path.
The recommendations of the World Bank also mirrored the private sector's analysis that Beijing needs to reconstruct their government-dominated banking system, which finances state industry at the expense of savers while providing little credit to entrepreneurs and emerging industries, Washington Post noted.
"China has reached a critical phase of its economic and social development path," the World Bank said.
Furthermore, the bank added that China's financial system must be overhauled to increase the efficiency of new investments and broaden access to finance which will enable the East Asian nation to sustain solid growth and re-stabilize its economy.
The communist governance is currently under scrutiny for its efforts in making China's economy more efficient and productive, partly giving entrepreneurs a bigger role. Because its efforts fell short of what the country could and should have done, China vowed to make the banking system more market-oriented since it has only taken limited actions to alleviate controls on interest rates and increase lending to the private sector.
The World Bank said Beijing must separate its roles as the owner of China's banks, the regulator and the strategic planner. Beijing also needs to establish a system that channels more lending to productive industries and to manage risks better.
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