As China continues to post staggering growth numbers many experts are concerned that the individuals in charge of guiding that economy are not capable of preventing it from overheating. Their doubts are supported by the fact that transparency and economic efficiency have not been hallmarks in what has rapidly grown into the world's fourth-largest economy. The question, then, is how likely is a crisis and, if it does come, what will be its source? China observers point to its underdeveloped financial and foreign exchange systems as a potential area for concern.. There is no doubt that the Chinese government has enacted some cautious reforms, but, if China expects its remarkable rise to continue, it must embark upon a far more ambitious path to reform.

China's Financial Transition at a Crossroads emerged from conferences sponsored by the Chazen Institute of International Business at Tsinghua University (Beijing) in 2005 and at Columbia Business School (New York) in 2006. In this timely study, the contributors examine not only the reforms that China must enact to fix the inefficiencies in its economy but also the probability that China's policymakers will successfully implement them.

As China's economy becomes more developed, maintaining growth becomes more challenging and the importance of efficient capital market allocation rises over time. The presence of under-performing state-owned entities, a banking industry which lends to these entities and a high national savings rate all currently obstruct efficient capital flows. Calomiris et al. contend that China can no longer follow the momentum generated by its dramatic rise as an economic power and must now confront difficult choices in six important respects: 1) reform of the banking sector and securities markets, 2) foreign exchange, 3) international capital flows, 4) the role of the Chinese government, 5) US-China relations on trade policy, global capital inflows and the RMB, and 6) China's own internal political evolution.

In the chapter available below, Professor Lee Branstetter provides a historical overview of the development of Chinese capital markets and reform in the three major sectors of the Chinese economy: banking; equity, debt and insurance markets; and foreign exchange and capital controls. It is clear that China has indeed made remarkable progress in modernizing its financial institutions as discussant Professor Xiaobo Lu agrees. In his commentary, Lu offers a compelling analysis of Chinese financial market development in the larger context of social and economic reforms in China. He argues that while some external observers criticize the pace of China's reforms, it is consistent with policymakers' preference to a more gradual approach which maintains stability and minimizes transition pains. However, Lu concludes that while the old approaches have yielded desired results, more innovative solutions are needed to achieve compliance with WTO regulations and make China's financial sector globally competitive.