While the financial systems of China and India have grown from quite dissimilar roots, today they face many similar problems. Both countries are now pursuing growth strategies based on relatively free markets, yet neither has the financial system it needs to sustain rapid and efficient growth in the years ahead.
The most striking similarity between the two financial systems is their inefficient allocation of capital. In both countries, the government is distorting the financial system to achieve social ends—in India, to fund the government's persistently large budget deficit and its rural investment priorities; in China, to ensure a continued flow of funding to its many inefficient but massive state–owned enterprises in order to preserve jobs.
While these goals are understandable, the policies have similar unfortunate consequences in both countries: wasteful investments; restricted funding options for the private companies that are driving growth; high levels of state ownership of financial institutions, which limit competition and lower efficiency; minimal growth in the countries' underdeveloped corporate bond markets; and few choices of financial products for consumers.
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