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Hold on to your hats for financial liberalisation in China, says The Economist

BritCham / CBBC
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The following article appeared in The Economist here on 14 March 2014.
March of the banks
Financial liberalisation moves ahead in China
“Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly.” So declared Wen Jiabao, China’s former prime minister, two years ago. He went on to say that the only solution was to allow more private capital in banking.
That seemed unlikely to happen soon, given the firm grip the government has had on banks in the country. The industry is tightly regulated, with deposit interest rates controlled by the authorities and all bank savings enjoying the implicit backing of the state. The biggest Chinese banks, which also happen to be the largest in the world, are all state-run.
Undaunted, the newish government of President Xi Jinping vowed to push ahead with financial liberalisation. This week it did just that. On March 11th regulators approved a pilot scheme to allow five privately owned banks to be set up in various parts of the country. The new banks will be regulated much as existing lenders are, but will be required to have clear provisions for orderly dismantlement in case of bankruptcy.
By welcoming more private capital, officials are hoping to inject competition and innovation into China’s sclerotic banking sector. The aim is for these new banks to target small and medium-sized enterprises, long starved of capital by the state-run banks (keener to lend to state-owned enterprises). Two giant Chinese internet firms, Tencent and Alibaba, are among the chosen investors. That suggests the authorities are taking a favourable view of the forays the two firms have made into internet finance.
Boosters of liberalisation were also cheered this week by the prospect of the country freeing interest rates. China’s long-standing policy of financial repression has involved a strict cap on the rates earned by bank deposits. So ordinary folk have ended up subsidising loans made by state banks to favoured state-run groups.
Happily, this policy looks set to change, too. Zhou Xiaochuan, the head of China’s central bank, said this week that deposit rates will be liberalised within two years. This comes on the heels of an official pledge to introduce a deposit-insurance scheme this year.
China’s leaders were so worried about the risks of liberalising too quickly that the pace of reform has often seemed glacial. No longer. Its banking sector is now opening up faster than the critics thought possible. Hold on to your hats.
Source: www.economist.com (14/03/2014)
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