July 15, 1998

In 1993, China initiated a series of economic reforms to address the fundamental problems created by the transition to a market economy. These reforms have successfully established a more competitive environment in China, though there is still much left to be done. In this new climate, the inefficiencies of China's State Owned Enterprises (SOE) are even more apparent. The profitability of SOEs has plummeted since 1995, resulting in a rapid increase in problem loans for Chinas banks. These bad loans currently amount to nearly 2 trillion RMB ($240 billion). To remedy this financial problem, China implemented further financial system reforms and accelerated the privatization of SOEs. Today, with the added problems of regional recession and financial turmoil, China must choose either economic recovery or stability for its currency -- the RMB. If China can successfully climb out recession, and weather the regional economic downturn, its structural reforms will move the country further towards a genuine market-based economy.

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