Reporters take photos at the launch ceremony of the China (Shanghai) Pilot Free Trade Zone on September 29. Photo: CFP

Editor's Note:

China's annual Central Economic Work Conference, held between December 10 to 13, not only pledged to achieve reasonable growth for the new year, but also set deepening reforms as a core task of next year's economic work.

The road map for China's much-anticipated financial reforms has become clearer following the Third Plenary Session of 18th Communist Party of China Central Committee held in mid-November.

The country's top leadership has promised to bring vitality to the economy through market-oriented reforms rather than short-term stimulus, and reform in the financial sector is regarded as an engine for the real economy.

Liberalization of interest rates and exchange exchanges, IPO reform, promoting yuan's convertibility under the capital account are all on the agenda, as has been recently reiterated by top officials from the central bank, banking and securities regulators on various occasions.

China (Shanghai) Pilot Free Trade Zone (FTZ) is seen as a test ground for the country's financial reforms. The market expects more policies to be rolled out in the coming high-level meetings next year. 

Graphics: Global Times

Private banks meet approval

Xiandai Investment Co is the latest A-share listed company to announce its participation in the banking sector. Shortly after the Hunan-based expressway operator said it was preparing to set up a private bank with four partners, its shares rose by over 5 percent on December 11.

According to the document on major issues concerning comprehensively deepening reforms released after the third plenary session, qualified private firms will be permitted to set up small and medium-sized banks and other financial institutions on condition of strengthened supervision.

The State Administration for Industry and Commerce has already approved nearly 50 corporate names for private banking entities since July, when the State Council unveiled guidelines on setting up banks invested in by private capital and bearing their own risks.

The applicants come from various industries ranging from coal mining to home appliance manufacturing, and include large companies like Suning Commerce Group Co.

"Besides policy support, private investment's enthusiasm for setting up banks is mainly due to the high profit margins in China's banking sector," Huo Xiaohua, a finance industry analyst with Shenzhen-based CIC Industry Research Center, told the Global Times.

All of the 16 mainland-listed commercial banks posted net profits totaling 918.38 billion yuan ($150.7 billion) in the first three quarters of 2013, up 12.99 percent from a year earlier and accounting for more than half of the total net profit generated by all of the 2,467 companies listed in the A-share market.

Private investment has long been barred from setting up banks. Since the China Minsheng Banking Corp, a national joint-stock commercial bank with investments mainly from non-State-owned enterprises, was established in January 1996, no private banks in China have been officially approved.

"Authorities have concerns that allowing private capital into the banking sector is likely to bring systemic financial risks, and it is a difficult task to break the monopoly in the finance sector," Huo said.

The China Banking Regulatory Commission (CBRC) has yet to release detailed requirements for private capital to set up banks. The only hint from the top banking regulator is five principles brought forward by Yan Qingmin, vice chairman of CBRC, at a forum held in late November.

According to Yan, private banks must be purely initiated by private capital, bear their own risks, and pledge to shareholders that they will be supervised by the authorities, meanwhile, they will be offered licenses with restrictions and should have a contingency plan to avoid problems.

"The principles are aimed at reducing government intervention, protecting depositors' interests and preventing systematic risks in the banking industry," Huo said.

Private firms are still waiting for further details such as private banks' registered capital and operational scope, but insiders expected the first batch of private banks is expected to be approved as soon as the end of this year in Beijing, Shanghai and Shenzhen municipalities as well as East China's Zhejiang Province, China Securities Journal reported on December 10.

Related

IPOs set to reopen after fraud worries
Reform of the often volatile stock market is front and center of the country's new financial plans, but whether frauds and fears can be cleared up remains to be seen after authorities end a 13-month freeze on IPOs.

Yuan’s fate to be decided by market
China started the long journey to reform its exchange rate formation mechanism in 2005, when the People's Bank of China (PBC), the country's central bank, announced that the yuan would no longer be pegged to the US dollar.

Experts' views



Zhou Dewen 

Head of Wenzhou Council for the Promotion of Small and Medium-sized Enterprises (SMEs) 

The pilot financial reform scheme in Wenzhou, launched in March 2012, has achieved some positive results, such as legalizing private lending, but still failed to meet market expectations in terms of establishing private banks.

Although the 20,000-character-long document released after the third plenary session does not use many paragraphs describing financial reforms, it has mapped a blueprint for financial reforms ranging from allowing private investment to set up financial institutions to liberalization of interest rates.

As far as I know, regulations and rules for private banks have already been submitted to the State Council for approval.

Some scholars suggest the banking regulator figure out an exit mechanism for private banks and establish a deposit insurance system before issuing license to private banks. They have no idea how eagerly SMEs look forward to easier access to loans.

The establishment of private banks will be a milestone in China's finance history, as it breaks the monopoly in the finance sector.

Chris Leung

Senior economist with DBS Bank (Hong Kong) Ltd

China's reformers must strike a balance between the depth and scope of reforms. Deepening reforms in concentrated areas is easier to manage and is the most compatible with reform sustainability.

For structural reforms to be sustainable, they must go together with institutional reforms ranging from establishing central bank independence, building a judicial system capable of supporting complex contractual obligations, ensuring bureaucratic independence, and other associated reforms.

If financial reforms are really to proceed at a faster pace with swifter interest rate liberalization, then it will level the playing field for foreign banks somewhat. That will only be realized in the long term.

In the retail banking space, foreign banks cannot compete easily with Chinese ones given the scarcity of distribution network. One area that can compete with Chinese banks is through financial product innovation but that requires a lot of deregulation from the regulators.

A lot of private firms have shown interest in setting up private banks, but their participation will be very limited at the beginning given the scarcity of experience and human resources available to them.

Besides, this is a new business model in which they do not have prior experience.

Liu Dongliang 

Senior currency analyst at China Merchants Bank

I do not expect the People's Bank of China (PBC), the central bank, to make significant moves to reform the yuan's exchange rate formation mechanism in 2014.

The central bank will likely realize interest rate liberalization first, and then move on to reform the exchange rate system. 

The PBC has not made big moves other than widening the range that the yuan's exchange rate can fluctuate up and below the central parity rate, because reworking the formation mechanism is a necessary but not an urgent one.

China needs to follow several steps in carrying out reform. The PBC needs to first stop regularly interfering in the foreign exchange market and let banks, instead of the government, decide the central parity rate.

I expect this can be done in two or three years.