Nearly all banks and non-bank financial institutions are heavily controlled by the state, interest rates and the exchange rate are tightly regulated, the capital account is mostly closed; and credit allocation is politicized, with preference given to state-owned enterprises (SOEs).
There has been some liberalization of the financial sector and interest rates, and the exchange rate is more flexible than previously, but the lack of widespread private ownership and free entry has limited competition and hampered the efficient use of scarce capital.
China’s efforts to commercialize its banks have been half-baked: Without well-defined private property rights and a legal system that supports economic and personal freedom, including the free flow of information, China’s dreams of becoming a world-class financial center and internationalizing its currency remain unfulfilled.