Austerity and Moral Compromise: Lessons from the Development of China's Banking System

Summary China's state-owned banks have demonstrated a tremendous capacity for change, but their implications for development policy are often unclear. The paper examines why the pre-reform banking system based on moral compromise almost seamlessly changed to one based on self-advancement. Focusing on a period when resources were desperately short, the paper argues that China's great advantage has been Hong Kong and the safe access to international markets it provided. Consequently China's leadership is more familiar with international markets than is often assumed, and although capitalism is no longer exceptional, access to formal institutions continues to be a core development priority in achieving modernization.