Securing bank credit is key to financial reform, expert says

Securitizing commercial banks' credit assets is the key to financial sector reform, said Li Daokui, a former adviser to the People's Bank of China.

And yuan convertibility under capital account will take shape in five years, he said.

The China Securities Journal reported on Thursday that Li, who is a professor at Tsinghua University, said that further securing bank loans is the right "cut-in point" for the reform, as it can spur the debt market and change the entire financial structure.

"This is key to reform of the commercial banks and the whole financial market. It will not only help banks to supplement capital, but also promote development of the debt market and provide more investment channels for the public."

He said the government should first allow banks to securitize some less risky assets, such as property mortgage loans with a down payment higher than 50 percent.

"We must realize that such securities shouldn't be sold and purchased among banks. Instead, they must be held by social security funds and individual investors to reduce pressure on banks and capital market."

Authorities last year authorized a quota of 50 billion yuan ($8 billion) for the country's lenders to secure their loans, which includes lending to local government financing vehicles.

Li also said the time is ripe for China to announce operation plans for yuan convertibility under capital account as capital inflows accelerate and export enterprises are facing great pressure.

"But we must be aware that once the capital account opens, China might witness a large amount of capital outflow, which will crush capital markets and lead to deposit withdrawals from banks."

He suggested the government could set up a temporary "firewall", such as fixing an upper limit of purchasing foreign currencies for bank accounts if capital floods out.