non-listed firms with various types of ownership structures. It is important to point out at the or that our definition of the Hybrid Sector is broader than privately or individually owned firms,w are part of this sector. In particular, firms that are partially owned by local governments(e.g Township Village Enterprises or TVEs)are also included in the Hybrid Sector, because: first, despite the ownership stake of local governments and the sometimes ambiguous ownership structure and property rights, the operation of these firms resembles more closely that of a for- profit, privately-owned firm than that of a state-owned firm; and second, the ownership stake of local governments in many of these firms has been privatized. The growth of the Hybrid Sector has been much higher than that of the State Sector(state-owned enterprises or SOEs, and all firn here the central government has ultimate control) and the listed Sector(publicly listed and traded firms with most of them converted from the State Sector ), and contributes to most of the economic growth. We believe these alternative channels and mechanisms should be encouraged going forward. They can co-exist with the banks and markets while continuing to fuel the growth of the Hybrid Sector Finally, in our view a significant challenge for Chinas financial system is to avoid damaging financial crises that can severely disrupt the economy and social stability. China needs to guard against traditional financial crises, including a banking sector crisis stemming from continuing accumulation of NPLs and a sudden drop in banks' profits; or a crisis/crash resulting from speculative asset bubbles in the real estate market. China also needs to guard against new types of financial crises, such as a"twin crisis"(simultaneous foreign exchange and banking/stock market crises)that was prevalent in many Asian economies in the late 1990s. The entrance of China into the World Trade Organization(WTO) introduces cheap foreign capital and technology but large scale and sudden capital flows and foreign speculation significantly increase the likelihood of a twin crisis. At the moment, the rapid increase in China's foreign exchange reserves suggests that there is a large amount of speculative money in China in anticipation of an appreciation of the hina's currency, relative to all other major currencies. Depending on how the government and the central bank handle the process of revaluation, there could be a classic currency crisis as the The Hybrid Sector comprises all the firms that are not state-owned or publicly listed, and more specifically, it includes the following types of firms(see Appendix A. 5 for details): 1)privately owned companies(but not publicly listed and investors(or companies); 2)collective\ g iontly-owned companies, where joint ownership among locr r foreign traded) controlling owners can be Chinese citizens, investors(or companies)from Taiwan or Hong Kong government, communities, employees, and institutions is forged. See Li(1996)and Che and Qian(1998)for arguments on why an ambiguous ownership structure with local governments is more efficient than well defined private property rights or state ownership in an environment with underdeveloped markets and institutions4 non-listed firms with various types of ownership structures. It is important to point out at the outset that our definition of the Hybrid Sector is broader than privately or individually owned firms, which are part of this sector. In particular, firms that are partially owned by local governments (e.g., Township Village Enterprises or TVEs) are also included in the Hybrid Sector, because: first, despite the ownership stake of local governments and the sometimes ambiguous ownership structure and property rights, the operation of these firms resembles more closely that of a for￾profit, privately-owned firm than that of a state-owned firm; and second, the ownership stake of local governments in many of these firms has been privatized.1 The growth of the Hybrid Sector has been much higher than that of the State Sector (state-owned enterprises or SOEs, and all firms where the central government has ultimate control) and the Listed Sector (publicly listed and traded firms with most of them converted from the State Sector), and contributes to most of the economic growth. We believe these alternative channels and mechanisms should be encouraged going forward. They can co-exist with the banks and markets while continuing to fuel the growth of the Hybrid Sector. Finally, in our view a significant challenge for China’s financial system is to avoid damaging financial crises that can severely disrupt the economy and social stability. China needs to guard against traditional financial crises, including a banking sector crisis stemming from continuing accumulation of NPLs and a sudden drop in banks’ profits; or a crisis/crash resulting from speculative asset bubbles in the real estate market. China also needs to guard against new types of financial crises, such as a “twin crisis” (simultaneous foreign exchange and banking/stock market crises) that was prevalent in many Asian economies in the late 1990s. The entrance of China into the World Trade Organization (WTO) introduces cheap foreign capital and technology, but large scale and sudden capital flows and foreign speculation significantly increase the likelihood of a twin crisis. At the moment, the rapid increase in China’s foreign exchange reserves suggests that there is a large amount of speculative money in China in anticipation of an appreciation of the RMB, China’s currency, relative to all other major currencies. Depending on how the government and the central bank handle the process of revaluation, there could be a classic currency crisis as the 1 The Hybrid Sector comprises all the firms that are not state-owned or publicly listed, and more specifically, it includes the following types of firms (see Appendix A.5 for details): 1) privately owned companies (but not publicly listed and traded): controlling owners can be Chinese citizens, investors (or companies) from Taiwan or Hong Kong, or foreign investors (or companies); 2) collectively- and jointly-owned companies, where joint ownership among local government, communities, employees, and institutions is forged. See Li (1996) and Che and Qian (1998) for arguments on why an ambiguous ownership structure with local governments is more efficient than well defined private property rights or state ownership in an environment with underdeveloped markets and institutions