Government motivated reform offinancial marketization．“modef andperformance
Before any further discussion of the preference conflicts of the State－owned specializedbanks and their influence，we offer a simple model to explain the path and performance offinancial reforms under decentralization in this section．
Look at figure 2．Suppose the financial marketization reforms face two types offinancial resources，respectively represented by the horizontal axis FRl and the vertical axiSFR．This indicates that our focus will be allocation efficiency．Two production frontiersPP，and PP，show scales of financial resources in different allocation situations，referringto both the scale of credit provision and the scale of financial institutions expansion．It isfurther supposed that a theoretical optimum concerning the allocation of financial resourcesexists．namely．a Pareto optimum that stands for the best level of financial development，reDresented by a set of indifference curves labeled by III in the figure．With the financial system being State—owned at the beginning of the reform and FRl reflecting the preference
of t11e central government，we are justified to say that A was the initial equilibrium point(i．e．the starting point of the reform)．In this case，the State financial utility function(representedby aset of indifference curves labeled by I)12 is tangent to PP I．Generally,in a centrallyplanned economy,marketization entails the reduction of the amount of financial resources reflecting the preference of government and the gradual movement toward a new state of equilibrium fi．e．from point A to point B)，with the result of the curve representing socialwelfare and resource allocation efficiency shifting from a lower level IIIl to a higher levelIII，This is a process of strengthening the market force and improving the efficiency ofallocating financial resources，thus a process of financial development．However，through the previous discussion，it is known that after the decentralization eform，local element(including the private preference of State-owned banks)has begun to influence the allocationprocess，with the result being the rapid expansion of financial organizations and a sharp
increase in the credit volume provided by State—owned banks．This indicates an outwardmovement of the production frontier from PP l to PP2．In response to local governments’desire to allocate more of the financial resource FR2 according to their own preference，thefinancial utility function 112 will be tangent to PP2 at C and the preference of localities are best satisfied．
