Nevertheless, several indicators suggest that state-owned firms are having difficulties keeping up with their competitors. In recent years many state-owned enterprises have seen their profits dwindle and turn into losses. These losses have put further strains on the economy, mainly through their effect on the financial system. China's banking system is dominated by 4 large state commercial banks, which together account for over 90 percent of bank assets. Their growth since the reform has been impressive.
China now has something quite close to a modern financial system.
But worryingly, state banks are still not completely free to lend according to financial criteria. The result has been increasing non-performing assets and decreases in bank capital. The small allowed spread between lending and deposit rates have exacerbated this problem. These challenges illustrate the complex links between the financial system and the real economy. The pace and form of restructuring of state owned enterprises and deregulation of interest rate must take into account the impact on the financial sector.