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This chapter examines why governments are choosing to privatize state-owned banks (SOBs), how they are selling SOBs, and whether these sales have achieved the goals set by the divesting governments. The overall impact of state ownership of banks has been disastrous in almost every country. Reducing state influence on credit allocation decisions is essential for countries seeking to establish a more efficient and market-oriented economy. Privatizing governments should completely divest their ownership in banks whenever and wherever it is politically feasible to do so. Privatization is also associated with performance improvements in divested banks, though the extent of improvement varies by region and stage of national development.

This chapter chronicles the development of China's financial system and compares it with those of other countries. Four main conclusions are drawn about the financial system and its future development. First, the large banking sector dominated by state-owned banks has played a bigger role in funding the growth of many types of firms than financial markets. Second, the stock market has been growing fast since 1990, but has played a relatively limited role in supporting economic growth. Third, alternative financing channels have had great success in supporting the growth of the Hybrid Sector, which contributes most of the economic growth compared to the State and Listed Sectors. Finally, a significant challenge for China's financial system is to avoid damaging financial crises that can severely disrupt the economy and social stability. A commentary is included at the end of the chapter.

This chapter deals with state-owned enterprises (SOEs). SOEs dominated the Chinese economy throughout the centrally planned period from 1949 to 1978. The state funded SOEs directly through subsidies and indirectly through the state-owned banks. The transfer of credit to SOEs from state-owned banks resulted in significant accumulation of non-performing loans (NPLs). The system of supporting SOEs led to inflationary episodes and worsened by the ‘dual track’ transition where the state-owned banks undertake direct lending to the more efficient non-state sector.

This chapter examines the institutional design of rural credit cooperatives (RCCs) and whether it influences patterns in their lending. Drawing on the results of a household survey, it considers the factors that shape loan officers' behavior and affect the loan allocation process. Although not part of the state bureaucracy, RCCs are subject to a dual accountability system similar to that of any subnational bureau in China. Comparison of RCCs' line of reporting and supervisory structure with that of state-owned banks such as the Agricultural Bank of China and the People's Bank of China further illustrates why credit cooperatives are more susceptible to local-government influence. This chapter first discusses existing explanations for the rural credit sector outcome, particularly bias in lending toward local government-owned enterprises. It then provides an overview of RCCs' corporate governance structure and explains why China's banking regulator cannot supervise RCCs effectively. Finally, it analyzes lending patterns by rural cooperative foundations.

This chapter focuses on China and Vietnam--two countries whose political context and transition trajectory differ from those of the other six. The case of China deserves special attention due to the country's sheer size: it is particularly challenging to create a credit card market in a country of more than one billion people, only a small number of whom have bank accounts. Establishing cooperation between banking institutions thousands of miles apart is equally challenging. The Chinese government views cards not as a market, but as part of China's payment system. It has been successful in developing its domestic card system that poses challenges to multinationals not only domestically, but also internationally. The Vietnamese market is the least developed of all eight countries. Its retail banking covers an even smaller percentage of the population than the banking system in China, and its IT infrastructure is even more inadequate.

This chapter studies the presence of political cycles in Turkey’s recent economic history. It first discusses the incentives and the ability of the central government to engage in opportunistic behavior to boost economic activity around local elections. It then describes how the tools available to the government on the fiscal and banking fronts have changed since the 2001 crisis. The chapter documents suggestive evidence that state-owned banks engage in selective lending in the run-up to local elections when compared with private banks. This selective lending seems to favor provinces where the governing party faces greater competition from the opposition. There is less evidence regarding fiscal spending. The chapter discusses the implications of politically motivated policies on financial inclusion and aggregate efficiency.

The rapid rise of the entrepreneurial private sector in China is one of the key reasons for the success of its transition from a centrally planned economy toward becoming a market-oriented one since the late 1970s, which was explored in part in the last chapter. At the same time, China is a country known for its incomplete legal system, which includes the lack of an independent judiciary, and adjudication is not free from interference from the executive branch. In addition, there is evidence of financial repression whereby legal and institutional constraints impede the development of financial intermediaries, thereby retarding the development of the financial sector. In China, this is manifested insofar as the rules favour state-owned enterprises (SOEs) despite three decades of reform. SOEs still dominate credit allocation, such that the majority of private small- and medium-sized enterprises (SMEs) obtain no bank financing even in 2006 (Lin 2007). This chapter investigates the impact of lagging financial and legal systems on private sector development and complements the previous one.