China’s Financial System - a Comparative Analysis of its Characteristics with Banking- or Market-based Financial Systems

Abstract Purpose: This study analyzes the future development of the Chinese Financial System (CFS) based on the theory of financial market development and the past regulatory changes within the Chinese financial system. The result of our study, a framework for the CFS’s development, may hold predictive power over future regulatory changes. Design/Methodology/Approach: To assess the state of the CFS theory predicted evolution from being banking-based to market-based, we apply primary research and conduct expert interviews to analyze the evidence from internal stakeholders about the systems development. We conduct five interviews with three stakeholder groups: a.) Manager of growth-stage startups (Demand public/private equity and debt); b.) Equity investors (Supply private/public equity and debt); c.) Managers at State-owned banks (Supply debt). Findings: We demonstrate that the CFS has the characteristics of a banking-based system as it relies on traditional debt financing provided by banks but also equity funding from stock markets. Those banks allocate capital based on market forces and aligned with the Chinese government’s long-term 5-year plan and are effective in stimulating growth on an industry level. While debt markets are more dominant there is also a strong equity funding system based on the respective stock markets. Research and Practical implications/Originality: Our framework aids the reader in putting past and upcoming changes of financial systems into perspective. The detailed overview of the CFS offers an entry point to understanding Chinese financial regulation. It provides a theoretical perspective on the Chinese government’s long-term goals when applying our framework. JEL: E51, E59, E61, E62