Foreign competition can help Chinese financial institutions expand, develop

By Hu Weijia Source:Global Times Published: 2017/9/19 21:48:39

The People's Bank of China (PBC), the nation's central bank, "is drafting a package of reforms that would give foreign investors greater access to the nation's financial services industry," Bloomberg reported recently. We cannot rule out the possibility that domestic institutions may take a hit from increasingly intense competition from foreign investors, but this is perhaps an inevitable phase of the sector's growth and development.

PBC Governor Zhou Xiaochuan said in June that undue protection of domestic institutions had led to complacency and flagging competitiveness, which had damaged the development of the industry. The high leverage ratio in the non-financial sector has resulted in a gradual rise of the banks' nonperforming loan ratio, but excessive protection has partly obscured the risks building up in the nation's financial sector.

Although protecting the local financial sector from intense international competition can buy time for the development of domestic financial institutions, which have always been major funding sources for China's State-owned enterprises and companies in strategic emerging industries, this situation also leads to the accumulation of hidden risks and fosters an inefficient financial system.

After years of hyper-fast credit growth, regulators should give top priority to maintaining China's financial stability. Many economists expect risk control and improving financing efficiency to serve the real economy will be the major goals of financial reform in the second half of this year. Introducing more competition in financial operations will be conducive to establishing a sound mechanism and preventing systemic financial risks.

Continuously opening up the financial markets is essential. According to the report from Bloomberg, China may raise "the current 25 percent ceiling on foreign ownership in Chinese banks." This is considered a big step but it will not be the end of China's opening-up progress. Domestic financial institutions have learned a lot from the competition with foreign lenders since transnational financial powerhouses entered the Chinese market. Share purchases between local and overseas banks will further improve their corporate governance and operating efficiency.

What's more, China is witnessing an unprecedented boom in outbound investment. With the implementation of the Belt and Road initiative, the internationalization process of domestic financial institutions needs to accelerate.

In recent years, the world has seen a rapid expansion of China's financial reach beyond its borders. This trend will continue. Opening up China's domestic market will be a demonstration to countries and regions along the route. Reciprocal opening-up will reduce fears and bias while boosting cross-border financial cooperation.

The author is a reporter with the Global Times.


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