government and central bank try to defend the currency peg, which in turn may trigger a banking crisis if there are large withdrawals from banks. In order to prevent such a crisis, policies improving the financial system should be implemented in conjunction with supportive fiscal and trade policie ganized as follows. In Section Il, the history of Chinas financial system development, present aggregate evidence on China's financial system, and compare them to those of developed and other developing countries. In Section Ill, we examine Chinas banking system and the problem of NPLs and reforms. In Section IV, we examine the rowth and irregularities of financial markets and listed firms. In Section V, we examine the non standard financial sector, including alternative financial channels and governance mechanisms. We then examine different types of financial crises and how China's financial system can be better prepared for these crises in Section VI. Finally, Section VIl concludes the paper and is followed by the Appendix that contains definitions and sources of all key terms and phrases used IL. Overview of Chinas Financial System In this section we examine China's financial system, focusing on both the banking system and financial markets, as well as firms' financing channels at the aggregate level, including non- bank and non-market channels. Appendixes A I through A 3 contain definitions and sources of variables used in Table I and Figures I and 2, while Appendix A 4 contains definitions of different types of financial intermediaries Il.1 A Brief Review of the history of Chinas Financial System Chinas financial system was well developed prior to 1949.- The earliest form of capitalism can be traced back to the late Ming Dynasty(17 century), with commerce initiated in the Zhejiang Jiangsu area and further developed during the Qing Dynasty (17 century to early 20century ). The Opium War(1840s) between China and Great Britain ruined China's sovereignty, but it brought Western-style legal and capital systems into Chinas coastal areas(until 1949). In 1904, the newly created Ministry of Commerce( Shangbu) of the waning Qing government issued China's first Company Law(Gongsili), aimed at promoting China's industrial development. Interestingly, foreign systems and the Chinese system co-existed and commerce boomed. Despite the entrance and development of Western-style courts in Shanghai and other major coastal cities(see Lee( 1993) For more details on the description of pre-1949 history of Chinas financial system and the rise of Shanghai as Chinas financial center, see, for example, Chow(2004), Kirby(1995), and Lee (1993)5 government and central bank try to defend the currency peg, which in turn may trigger a banking crisis if there are large withdrawals from banks. In order to prevent such a crisis, policies improving the financial system should be implemented in conjunction with supportive fiscal and trade policies. The remaining sections are organized as follows. In Section II, we review the history of China’s financial system development, present aggregate evidence on China’s financial system, and compare them to those of developed and other developing countries. In Section III, we examine China’s banking system and the problem of NPLs and reforms. In Section IV, we examine the growth and irregularities of financial markets and listed firms. In Section V, we examine the non￾standard financial sector, including alternative financial channels and governance mechanisms. We then examine different types of financial crises and how China’s financial system can be better prepared for these crises in Section VI. Finally, Section VII concludes the paper and is followed by the Appendix that contains definitions and sources of all key terms and phrases used. II. Overview of China’s Financial System In this section we examine China’s financial system, focusing on both the banking system and financial markets, as well as firms’ financing channels at the aggregate level, including non￾bank and non-market channels. Appendixes A.1 through A.3 contain definitions and sources of variables used in Table 1 and Figures 1 and 2, while Appendix A.4 contains definitions of different types of financial intermediaries. II.1 A Brief Review of the History of China’s Financial System China’s financial system was well developed prior to 1949.2 The earliest form of capitalism can be traced back to the late Ming Dynasty (17th century), with commerce initiated in the Zhejiang￾Jiangsu area and further developed during the Qing Dynasty (17th century to early 20th century). The Opium War (1840s) between China and Great Britain ruined China’s sovereignty, but it brought Western-style legal and capital systems into China’s coastal areas (until 1949). In 1904, the newly created Ministry of Commerce (Shangbu) of the waning Qing government issued China’s first Company Law (Gongsilü), aimed at promoting China’s industrial development. Interestingly, foreign systems and the Chinese system co-existed and commerce boomed. Despite the entrance and development of Western-style courts in Shanghai and other major coastal cities (see Lee (1993) 2 For more details on the description of pre-1949 history of China’s financial system and the rise of Shanghai as China’s financial center, see, for example, Chow (2004), Kirby (1995), and Lee (1993)