China Opens Banks Sector to More Competition

The governor of the People’s Bank of China (PBOC) has confirmed that the country’s deposit rates are likely to liberalised within the next one to two years – a move likely to be the prelude to allowing banks to set their own interest rates.

China is also launching a pilot project to set up five banks owned entirely by private companies, according to the People’s Daily, the Communist Party’s official paper. The China Banking Regulatory Commission has approved 10 companies to participate in the project, including e-commerce group Alibaba and investment holding company Tencent.

Shang Fulin, the chairman of the China Banking Regulatory Commission (CBRC), said at a briefing that the new banks will be established in the cities of Shanghai and Tianjin and in the provinces of Guangdong and Zhejiang. Each bank will have at least two founders.

Despite last week’s corporate bond failure involving Shanghai Chaori Solar Energy Science & Technology, Shang downplayed the risks. “China’s banks have been growing with high speed in recent years, which indeed brings some risks. But the risks are generally under control,” he said. “Our provisions and capital for bad assets are sufficient.”

Lending for SMEs

According to reports, although several companies applied to join the pilot project in late 2013, many were surprised that the CBRC approval process was completed so quickly. The new privately-owned banks will be subject to the same regulations as China’s large, state-owned institutions but will be encouraged to focus their lending to small and medium-sized enterprises (SMEs).

Reuters noted that China’s state-dominated banking system has received criticism for primarily granting loans to large state-owned firms, even though SMEs account for 60% of gross domestic product and about 75% of new jobs. However, banks and officials warned that even if these privately owned banks are permitted, it will not be an immediate solution to SME financing.

“A big problem of China’s banking sector is that state owned banks extend most of their lendings to state-owned companies,” Shen Jianguang, an analyst with Mizuho Securities, told the Agence France-Presse (AFP).”There was no good solution to the problem and so now they are trying to open up (the sector).”

 
The only bank in China regarded as privately owned is Minsheng Bank. Established in 1996, it is still subject to strict government control with its senior personnel appointed or approved by the Communist party.

No time table was given for when the new banks will begin operations.
“We will push forward the trial of the five banks in a prudent manner,
approving one only after it is ready to go,” Shang said. “That means the
timing of their launch of operation mainly depends on themselves.” 

Deposit Rate Liberalisation

China’s move towards further liberalisation will see financial markets decide the price of loans, which economists suggest will do much to eliminate wasteful investment funded by artificially cheap credit that has created an accumulation of debt.

“The final liberalisation of deposit rates is the last step of interest-rate marketisation,” PBOC Governor Zhou Xiaochuan told reporters. “Since many other interest rates have been liberalised, deposit rate liberalisation is definitely on our agenda. I personally believe it’s very likely to be achieved in one or two years.” The PBOC is expected to first launch a deposit insurance scheme before liberalisation to protect savers in case a freed-up market leads to major turbulence for smaller banks.

Analysts also predicted that the controls on deposit rates would be lifted gradually. The current ceiling on deposit rates is 110% of the benchmark set by the central bank, although Zhou said he expected deposit rates to rise as a result of liberalisation.

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