Role of capital market development in China's pursuit of long-term economic growth

Central to the direction China will take in the future is the role of capital markets within a bank-centered financial structure, and its continued development is the country's most important task for stimulating long term economic growth. This paper first introduces the models of financial structure from the developed world and surveys the experience of three relevant European transition economies. Next, the paper presents a brief historical overview of Chinese capital markets in the context of the last century. A description and analysis of the current efficacy of the Chinese financial system is then offered, followed by an examination of the system's ability to allocate risk and wealth. In conclusion, significant changes are recommended for the country's banking system as a means to supply capital to a rising entrepreneurial class. Policies and economic reforms in venture capital and private equity alongside of capital market improvements will spur balanced growth in the short and long term.