China opens up financial sector with promise of five private banks

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Amid fresh signs that China’s economy is cooling down, the world’s second-largest economy has announced that up to five private banks will be launched in China this year to open up its financial sector.

Operating on a trial basis, the banks will be functioning under the guidance and supervision of China’s banking authorities.

This authorities will create “demanding set-up criteria, limited licenses, enhanced supervision and a risk handling system,” the China Banking Regulatory Commission (CBRC) has been quoted as saying.

Analysts are predicting that opening up the financial sector – and the subsequent raising of competition – is key to China’s future growth.

“Bearing own risk”

Faced with an economic slowdown, China has long been planning how to loosen its grip on the financial and capital markets, in order to create a fresh wave of growth.

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Private finance will therefore either be used to restructure existing banks within the country or to launch new ones which “bear their own risks.”

In another dramatic revelation, the CBRC has stated it will also explore the possibility of opening up the sector to foreign banks.

Shadow banking

The move also highlights China’s growing concern over the increasing amounts of capital lent via shadow banking in the country.

Lending of capital by non-banking companies has fueled a surge in debt levels in China now totaling trillions of American dollars.

Financial services firm JPMorgan estimates shadow banking accounted for 69% of China’s gross domestic product in 2013.

Critics have argued the practice poses a major threat to the stability of China’s economic growth, and that it makes credit lending a less transparent environment.

Prompted by these worries, the Chinese cabinet has not only opened up the financial sector to private banks, but created new regulations for the sector.

Whilst no draft rules have been publicly released, three sources have confirmed to Bloomberg News that the new controls targets off-the-books loans and improves adherence to the current legislation.

Whilst the authorities are demanding greater supervision and regulating of China’s shadow banks in the document, they have also stated how the sector has benefitted China’s economy.

The Financial Times has quoted the document states “the emergence of shadow banks is an inevitable result of financial development and innovation [which has] play[ed] a positive role in serving the real economy and enriching investment channels for ordinary citizens.”

The document also stated that whilst the sector is currently under control, the risks are complex, hidden, and could present a problem at a later date, “as the 2008 global financial crisis demonstrated.”

Supporting the banking reform

Supporting this opening up of China’s financial sector is the country’s central bank, which has stated it will:

a)      Permit banks to trade deposits with one another using “certificates of deposit” – which feature interest rates determined by the market (and not, as with traditional deposits, on rate caps in China).

b)      Scrap the lower rates on lending limits in order to try and relax interest rates.

In addition, China created a free-trade zone in Shanghai – the country’s most populous city – in September.

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