Financial Market Liberalization in the People's Republic of China

This paper examines the process and challenges faced by China as it opens financial markets to foreigners. Since its entry into the World Trade Organization, China has become integrated into the global economy and achieved remarkable economic success. In negotiating its entry into the World Trade Organization, China agreed to ease restrictions on foreign financial institutions doing business in the country and to liberalize its financial market. However, the legacy of a central planned economy and strict financial repression may hamper financial sector development and China's efforts to move to a market-oriented financial system. In fact, many emerging market economies took a haphazard approach to financial liberalization leading to instability in their financial markets and a financial crisis. China should learn from these economies and be aware that successfully reforming its market, while simultaneously maintaining strong economic growth and avoiding the financial instability that may accrue from liberalization, will depend on careful and skillful implementation of economic reforms.