Markets have been paying growing attention to the upcoming Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee. A blueprint for major reforms over the next decade is expected to be announced during the four-day conference, which starts on Saturday.
President Xi Jinping and Premier Li Keqiang both said at meetings with global think tank the 21st Century Council over the weekend that comprehensive reforms will be pushed forward during the session, which is also known as the Third Plenum.
The CPC has a tradition of making important decisions on major reforms and directional changes of policy at the Third Plenums.
In 1978, the Third Plenum of the 11th CPC Central Committee marked the start of China's reform and opening-up period. The Third Plenum of 1993 set the course for a socialist market economy, which laid the foundation for a series of reforms focusing on State-owned enterprises (SOEs) and the banking sector, among others.
Financial reform at the core
"Financial reform is the core of the overall reforms," Xu Hongcai, director of the Department of Information at the China Center for International Economic Exchanges, told the Global Times Monday.
Now is a good time to push forward with financial reform, as it can prevent financial risks at a time of economic slowdown, said Li Youhuan, an economist at the Guangdong Academy of Social Sciences.
A plan known as the 383 reform proposal recently released by the Development Research Center of the State Council, a key government think tank, received a lot of attention, partly because it was led by Liu He, deputy head of the National Development and Reform Commission. Liu's reported role as President Xi's advisor suggests that the plan may represent Xi's vision.
The plan's key suggestions include a lower threshold for access to the financial sector; development of a multi-layered capital market including bond and equity markets, in order to expand financing channels; introduction of private financial institutions, including financially sound Internet companies, into the State-dominated financial services sector; further liberalization of deposit rates; and gradual opening of the capital account.
The country should also set up a bank deposit insurance scheme, establish an exit mechanism for banks and deal with the bankruptcy of financial institutions through mergers and acquisitions, according to the plan.
What to expect
"I have a feeling that policymakers will let non-traditional financial service providers play [an increasingly important] role. In fact, they are much needed, especially for providing financing for small and micro-sized enterprises," Mao Yushi, a well-known economist and free market advocate, told the Global Times on October 31.
There won't be any breakthroughs at the upcoming Third Plenum, Mao said, as it focuses on direction rather than implementation details, "but policymakers will surely move forward."
However, Mao noted that tackling vested interests and SOE dominance of the banking sector will not be easy, and it will also be hard for the regulators to supervise a large number of smaller private banks.
The State-dominated banking sector is regarded as a highly profitable sector, as the banks enjoy lucrative and stable profit margins from the official deposit and lending rates. The banks generally prefer lending to low-risk SOEs and local government vehicles, and banks would hardly go bankrupt thanks to government backing.
In the first three quarters of 2013, half of the total profits made by listed companies in China's A-share market came from the banking sector.
The State Council unveiled guidelines in July to encourage private capital to establish small-sized financial institutions including private banks and consumer finance companies. The move was aimed at boosting financial support for cash-starved smaller firms, in an effort to revitalize the slowing economy.
Since the release of the guidelines, more than 20 private firms, including home appliance retailer Suning, have reportedly applied for banking licenses, showing the considerable enthusiasm in the country toward joining the banking sector.
The first batch of private bank licenses is expected to be granted as early as in the first quarter of next year.
Apart from private investors, traditional commercial banks are also facing competition from Internet companies that have started offering financial services.
Internet search firm Baidu, e-commerce giant Alibaba Group and Internet services portal Tencent are all developing financial services, offering netizens mutual funds, loans and insurance.
Alibaba's online payment service provider Alipay started in June to offer a money market fund product in partnership with Tianhong Asset Management Co. By partnering with Alibaba, Tianhong has become the largest fund in China by number of subscribers.
Alibaba has also worked with Tencent and Ping An Insurance Group to offer online insurance products, and Baidu recently launched two investment products by working with China Asset Management Co.
"I personally think the regulations are too strict. I expect this financial reform will bring us opportunities," Lu Hongyi, CEO of GoPay Information Technology, a third-party payment service provider, told the Global Times on October 31.
Many industry insiders said they hope that regulators will be more open toward new types of financial services.
Lin Feng, general manager of Chongqing-based Hanhua Microcredit Co, told the Global Times on October 31 that he hopes the financial reform will lift the cap on the borrowing quota of microcredit companies."
Free the banks
Interest rate liberalization is regarded as a huge challenge for traditional banks, but also an opportunity for transformation of the sector, the head of the Internet finance division of a bank, told the Global Times on condition of anonymity.
Regulatory requirements for face-to-face dealings and risk assessment with customers, as well as the minimum investment in wealth management products of 50,000 yuan ($8,143), constrains commercial banks from selling financial products online, she said.
Alibaba and Baidu both enjoyed hot sales with their funds because of their flexible practice in setting a very low threshold starting at 1 yuan, she said.
"It's not that banks do not want to be innovative, but we are constrained in terms of mechanisms," she said.
"Economic growth tends to slow in the years following previous Third Plenary Sessions, which reflects the fact that structural reforms, while good for the longer term, tend to slow growth in the short term. This is in part behind our below-consensus growth forecast of 7.1 percent for 2014, compared with 7.6 percent this year," Barclays Capital wrote in a research note sent to the Global Times Monday.