[MUSIC] Hello in this module we'll learn about the reform of China's fiscal and financial systems. As we all know in any economy, these two systems play a critical role in allocating resources and managing the macro economy. However, in China, reform in these sectors has been very difficult. And that is true for several reasons. The first is that China lacked institutional capacity in both tax collection and in financial management. What I mean to say is under the socialist planning system, the government did not need to collect taxes. It could just set prices in a way that would still profit to state on enterprises and then use those profits to provide public goods and services for investments. Only under a market system when prices were market determined that the government need to develop a new tax collection apparatus and this took time to develop. Similarly, on the financial side, under the planning system banks were really like cash register that did whatever the planners told them to do in terms of providing money to different units. In a marketing environment banks must make it their own judgement about the riskiness of different projects, and the riskiness of loans to different potential borrowers. And this have a capacity also takes time to develop. In addition, because these two sectors are so important to the overall economy. The government has been very reluctant to fully relinquish control to market actors. And so, that has led them to proceed very cautiously, and slowly, in reform. And finally, because so many resources are at stake. There are many actors, both in terms of government officials at every level, enterprises, and banking officials who have a very large stake, in reforms in this sector. And are possibly will slow down the reform speed. In this module, we will feature five presentations. The first two will address the problems of the physical system. Now at the beginning of the reform, China decentralized its physical system quite significantly very similar to how they'd decentralized decision making authority. To farmers and farm managers and the reforms that were discussed in module 1. Now in the second presentation, we will talk about the problems that this decentralization encountered and the later reforms to actually recentralize resources and also what are the current challenges facing the fiscal system? We will then turn in the remaining presentations to the financial system and we will first discuss the key incentive problem that hampers better performance of State Banks in China, and that is the soft budget constraint problem. After that, we will address more broadly the reform of the financial system, what has China done, and what are the remaining challenges. And finally, we will talk about shadow banking. Which is a recent phenomena that has received quite a bit of attention. And we'll discuss the advantages and disadvantages of this new phenomenon.