INTRODUCTION

China's financial sector has been undergoing continuous and dramatic changes as part of its transition from a planned economy to a'socialist market economy ‘. Roughly two decades ago, China's entire banking system was on the edge of technical insolvency as a result of rampant lending to local governments for projects that turned sour. The Chinese government had to overhaul the entire state-owned banking sector. Banking and insurance institutions have been diversified and have made great progress towards commercialization and marketization, and, along with China's accession to the World Trade Organization (WTO) in 2001, the banking and insurance markets have been gradually further opened up to foreign investment. More fundamentally, the banking regulatory regime has been substantially reformed and legalized even though it is in the flux of modernization.

When the financial crisis emerged in 2008, the Chinese banking sector was in a relatively good shape. Improvements had been made in the structure, transparency and oversight of financial institutions after years of governmentled transition towards a market-oriented banking system. In the global economic downturn, compared to counterparts in Western countries, Chinese banks have cemented their position as the most highly valued financial institutions in the world, taking four of the top five slots in a ranking of banks'share prices as a multiple of their book values. China Merchants Bank (with the price-to-book ratio at 4.3), China Citic (3.4), Industrial and Commercial Bank of China (ICBC) (3.1) and China Construction Bank (3.1) became the leading banks in the priceto- book league table in 2009, all with a price-to-book multiple of more than three while the average price-to-book value of the biggest 50 banks has halved from two to one in the past six years. Bank of Communications and Bank of China are also in the high rankings. Based on the benchmark of 80 global banks, Chinese banks averaged 20% return on equity while those in America averaged 13 %, those in Europe, the Middle East and Africa averaged 11%, those in the rest of Asia-Pacific averaged 12 % in the first quarter of 2011.