The Cloud for Dragons and the Wind for Tigers : Bank Governance Reform in China and an Executive-Based Proposal

China's banking sector has become too big to be ignored. Despite the splendid growth in the past decade, China's banking sector is now facing many challenges, including rising risk exposure, deteriorating profitability, and aggravating financial constraints in China's private sector. These problems result primarily from the unique bank governance model in China, which features the Chinese party-state's dominance of bank executives. In this paper, I review the potential problems underlying China's banking sector and conduct empirical investigations to demonstrate the association between these problems and the party-state's capture of bank executives. I then provide a critical view of the proposed bank governance reforms that are currently on the table. Acknowledging that the current bank governance problem in China is the party-state's excessive capture of bank executives, I advocate an executive reform that permits private block-holders to appoint more bank executives. To implement it, I propose two implementation methods: a more aggressive “state-owned-private-operated” model and a less radical “shared management” model. The ultimate goal is to permit private block-holders more executive power to facilitate the deliberation of a more delicate balance between the party-state's interest and the bank's business interest. This would prompt the Chinese commercial banks to not only run their businesses more efficiently but also perform the social policies more efficiently