Abstract ： Before the global financial crisis struck in 2008， it seems that the Chinese financial system was in good shape heading toward the first rank in stable speed. The subprime mortgage crisis occurred， however， which exposed the shortages of it in the structure， the nonperforming loans and banking regulation [1]， the conflict broke out especially in Zhejiang， the province which is famous for the massive small and medium-sized enterprises. This piece of work is supposed to find out the shortages of Chinese financial system through the analysis of the problem in Zhejiang， the concentrated performing point. According to the analysis， there will be some suggestions for improvement.

Key words ： China's financial reform Zhejiang small and medium-sized enterprises improvement

1. Introduction

The unpleasant period

As to the bank clerks in Zhejiang province， 2008 was a very unpleasant year with large quantities of nonperforming loans. But how could it happen？ Just before the subprime mortgage crisis quite a lot of banks were trying to set more branches or even agencies as to the city banks which were not allowed to have branches outside its own province or the foreign banks that were limited to certain big cities in order to share the huge profits here. This work will focus on this case and trace the ultimate cause as to find out the possible solutions about it. And we can give out several suggestions to the Chinese financial reform according to the analysis.

2. What happened at that time？

Most of the loans in Zhejiang province are from the small and medium-sized enterprises. Here come the problems：

Firstly， these companies are usually newly-born， weak and easy to fail. Though they may run well in the boom， a tiny hit in the depression can drive them to the dying state. Compared with large enterprises， these companies' small fixed assets are usually not enough to repay the loan. What's more， some of the small business loans are lack of mortgages and guarantee.

Thirty years ago， China's first private companies are mostly depending on the massive pool of subsistence laborers. Then they gradually divided along the way. Corporations like Trinity， Huawei and some other similar enterprises， transform from a simple labor-intensive production mode into a capital-intensive mode step by step. These companies will mostly survive the severe situation and take control of the challenges. While another type of private companies dreamed of going straight down this road. They are unable or unwilling to go on with the capital-intensive mode oriented transition. They will certainly be knocked out of the upgrading economy of China [2].

Secondly， in addition to the private equity capital， there also exists private speculative capital. A great number of small private enterprises actually turn their money into speculative capital because it is hard to run the industry. It takes quite a long time， continuous hard working and effective management. Compared with the speculative capital in the boom， most corporations， especially the small enterprises unable to upgrade their production mode， were attracted by the fast and easy money grabbing system. The terrible result was that these activities contributed largely to the high interest rate， making the companies that concentrated in equity hard to survive. Consequently， the inflation was inevitable.

Finally， the banks do not ask for strict guarantee and enough mortgages. What happened in Zhejiang at that time was that the small enterprises guaranteed each other， making the guarantee chain long and complex. The banks would lend money if the company had a guarantor strong enough， ignoring how many other companies the guarantor had guaranteed. Then when the crisis came， all of the companies in the chain went bankrupt and the banks suffered from a big loss.

3. How did that happen？

The banks and their staff were supposed to check the security of the loan first and think thrice. But at that period of boom， most of the banks took the profit first， ignoring the obvious risks stated above. The bank branches in Zhejiang province had enjoyed much higher risk tolerance level than any other provinces of China. The hard-working， honest Zhejiang Businessmen confused the rational bankers. The bankers gradually base their loans on the loyal credit of them. Luckily， it worked in the boom which lasted for years. The borrowers gave back the money in order to build up a long-term relationship with the banks and get more money in the future. Anyway， the bankers should not lose their cautiousness. Unfortunately， the nightmare came in 2008 in the end.

Except the neglect of the risks of the banks， what factors contributed to the consequence as well？

As has been noted above， the banks have settled quite a great number of branches and agencies in Zhejiang. You can even see several agencies in just one street. Yet does this area really need so many branches and employees？ Thinking of the limited financial market， the answer is obviously not. That ends in cut throat competition and even illegal dealings.

Meanwhile， is the supervision of the Chinese financial system blamed for nothing？ Of course not. Regulation of the banking system is still in its formative stages. We Chinese has not set up a comprehensive and enforceable legal system of finance to forbid the bank to lend money at an unusual interest rate， own too many risky assets or have branches more than needed [3]. The country's legal system is so weak that high-quality information about creditors is hard to find.

4. The problems of Chinese financial system

As Zhejiang acted as the concentrated performing point of China during the depression， the problems broke out in this province has some similarities to the problems of the entire financial system of the country.

The state-owned banks have gotten into trouble because they have lent massively to unprofitable state-owned enterprises. Some of the assets are nonperforming loans， which is risky， the same as the loans lent to the small and medium-sized enterprises in Zhejiang. Similarly， many state-owned enterprises are inefficient and invest in vast speculative business. Instead of the guarantee chain， the government sometimes acts like the guarantor.

In addition to the problems shared with Zhejiang province， the Chinese financial system has another problem that cannot be ignored. The Chinese financial system lacks freedom. This problem can be divided into two parts. The first one is that the banking sector is dominated by large state-owned banks （the \"Big Four\"）. The other is that the banks and institutions in China lack freedom in their operation. The two factors lead to the inefficiency of the Chinese financial system with too many branches and employees.

5. Countermeasures for the improvement

To start with， the Chinese government has to set up a comprehensive and enforceable legal system of finance to prevent the banks from lending money a high interest rate， owning too many risky assets or having branches more than needed.

Secondly， the People's Bank of China should establish a credit system as soon as possible so that the reliable credit information can be easily found.

Thirdly， the financial regulator should better strengthen supervision of the financial institutions.

Fourthly， the banks should take the risk management more seriously to protect themselves from big loss. What's more， they need to supervise the practical use of the money lent to the borrowers. They should act as responsible bankers but not gamblers. The banks have to speed up their disposal of nonperforming loans. With injections of about 200 billion dollars from the Chinese government， the arduous challenge seems easier to some extent.

Fifthly， the banks should better close unprofitable branches， and to lay off unproductive employees in order to improve the efficiency. Moreover， carry on a structure adjustment if possible.

Sixthly， the regulators should promote the equal competition among the banks including the \"Big Four\"， the private banks， the city banks and the foreign banks.

Seventhly， the massive risky but profitable debt of SMEs shows a kind of capital demand. But the stability of banking sector is closely related to the Chinese economy. Meanwhile， in order to put an end to the illegal fund-raising， loan sharking and many other issues， we can find ways to match these folk investment needs and the funding needs of SMEs. Apparently， the State Council has taken an important step. On March 28th， Premier Wen Jiabao chaired a State Council executive meeting which approved the \"Overall Program of The Comprehensive Financial Reform in the Experimental Zone， Wenzhou in Zhejiang Province\". The program indicates that in Wenzhou there will be no limit to the number of the small loan companies， the individual overseas investment is allowed and financial leasing companies can be set up [4]. This is also important to the country's future financial reforms and economic development.

Above all， the Chinese banks should be given more freedom in daily operation. Recently the Chinese government has already done something about it. China's banks operate within tight limits. The central bank imposes a ceiling on the interest rates they may pay to depositors and a floor under the rates they may charge borrowers. On June 8th， however， the central bank cut its \"benchmark\" deposit and lending rates to help stimulate the economy. Furthermore， it said that banks could offer depositors an interest rate 10% above the benchmark and borrowers a rate 20% below it [5].This is a quite important step toward the interest rate liberalization， which fills the financial market with much more competition， creativity and vitality.

6. Summary and outlook

The crisis broke out representatively in

Zhejiang province has exposed several shortages of the Chinese financial system. That indicated the urgency of China's financial reform. The Chinese government has already been aware of it and has introduced several major moves for the sake of getting the capital being properly allocated to obtain the maximum benefit. Whether China can succeed in the financial reform remains a big question mark. It is widely accepted that these endeavor may make sense because of the Chinese government which is specialized in drawing up long-term plans.

References：

[1] Editorial， \"Leader_Chinese Puzzle of Banking Reform\"， Financial Times， Nov 18th， 2011；

[2] 杜建國， “荒謬至極的‘銀行歧視私企’論”， http：//blog.sina.com.cn/， Nov 13th， 2012；

[3] Frederic S. Mishkin， The Economics of Money， Banking， And Financial Markets， PEARSON EDUCATION ASIA LTD. And CHINA RENMIN UNIVERSITY PRESS， 2010；

[4] 肖圣章， “溫州金融綜合改革的看點(diǎn)及信號”， 《經(jīng)貿(mào)實(shí)踐》， No.5， 2012；

[5] \"Free-range Banks\"， The Economist，Jun 16th， 2012， Hong Kong， the print edition

作者簡介：胡健薇（1991-），女，漢族，浙江人，遼寧大學(xué)經(jīng)濟(jì)學(xué)院09級國際金融。

（Work unit： Economics College of Liao-ning University ）