SOAS Research Online

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Abstract

While the current regulatory trend in the area of banking scope regulation favours integrated financial services provision, China continues to restrict commercial banks' permissible range of business activities via its 1995 Commercial Bank Law. In this article, we propose an analytical framework that explicitly incorporates the sophistication-level constraint of a country's financial system into the regulatory trade-off calculation between banks' need for new growth opportunities and an increased risk of financial instability. Applying this framework to China, we first discuss the episode of financial instability that led policy-makers to re-segment the financial industry in 1995 and then analyse the rationale behind China's recent, gradual movement back towards integrated financial services provision. While improved risk management capabilities mean that China may now be ready for a more liberal banking scope regulatory regime, we find that a financial crisis could still derail this important element of China's financial sector reform strategy