Banking regulator maps out reform

ZHANG CHENGLIANG / CHINA DAILY

Chinese regulatory commission faces balance between change and stability

The Chinese Banking Regulatory Commission held a key meeting on Jan 6 to propel reform in the Chinese financial and banking system. Given that this is the first commission national conference since the Party's Third Plenum in November and the Central Economic Work Conference in December, the meeting attracted considerable interest, domestically and internationally.

Of particular importance to the meeting is that, with the lion's share of assets in the Chinese financial system, the banking sector has enjoyed record growth, accumulating risks while facing mounting pressure for reform.

The timing of the conference was significant. The recent credit crunch in December, although not as devastating or unexpected as the first one in June 2013, raised increasing concerns about the liquidity and asset quality of the Chinese financial system. At the same time, the rapid growth of trust companies and Internet financing has absorbed a large fraction of shadow banking in its own system. The shadow banking system is not only taking away the market share of traditional banks, but also fundamentally challenging how traditional banks carry out their businesses.

Beyond business considerations, the commission is expected to communicate clearly how it plans to balance its mission to further reform the Chinese financial system and to maintain prudential regulation and systemic stability. Shadow banking, on the one hand, can facilitate the reform of interest rate liberalization and encourage market competition. On the other, if the pace of the reform is too quick and dramatic, it may expose the existing banking sector to risks and problems.

Among the many important topics discussed at the meeting, a few specific messages were conveyed.

First, the commission announced that the Chinese banking system welcomes the participation of both domestic and international players. Financial services, in particular banking, remain one of the most regulated areas of the economy. Consequently, banking has remained largely closed to domestic capital and foreign banks. Of course, part of the reason can be attributed to the banks' special social role and the potential impact on the systemic stability of the Chinese economy.

In addition, many argue that allowing more competition in banking should not only help Chinese banking become more competitive, but also provide much needed capital to small and medium-sized enterprises and diversity in the provision of financial services.

In particular, the commission announced that it would allow three to five privately capitalized banks to be established. This is certainly encouraging. Banking is one of the most coveted areas for private capital for several reasons. First, many private companies believe that financial services, banks in general, provide much better investment returns than industrial sectors. Furthermore, many private companies wish to obtain bank financing by setting up banks of their own. Given that bank loans remain one of the cheapest ways to finance private enterprises and are available to a select number of private enterprises, many private companies intend to take the problem into their own hands and operate their own banks.