Macroeconomics Case Study

China’s Banks and The Overheating Economy

OR

Abstract: China embarked on its ‘open door policy’ in 1978 under the leadership of Deng Xiaoping. The purpose was to bring about a transition in its centrally planned economy towards a market economy. The banks were supposed to play a major role in carrying out the reformist agenda of the country. Since then the country has achieved a phenomenal Gross Domestic Product (GDP) growth rate making it the fastest growing economy of the world.

This case study was primarily targeted at understanding the affect of Chinese economic reforms on the country’s banking sector. The case also helps in analysing the role of banking system in implementing monetary policy and its reaction to spiraling inflation.

Pedagogical Objectives:

• To understand and analyse the process of economic reforms in China and their effectiveness on the banking sector
• To study about monetary policy and money multiplier effects on the economy
• To analyse the reasons for the overheating of the economy
• To study the measures taken by the government in order to restructure the banking system.

Keywords : China's overheating economy; Chinese banks; People's Bank of China; State-owned enterprises; Gross domestic product (GDP); Private domestic savings; Liquidity and easy credit; Non-performing loans (NPLs); Guanxi; Inflation rate and interest rates