China’s path to reforming its shifting economy has led to both liberalization for domestic firms, and more recently, increased controls for outsiders looking to get into the Chinese financial scene.
The country is trying to change from economy-driven on foreign money and investment to one powered into a new period by its own prospering consumers. However, problems remain en route to this destination, notably what could be a vast amount of bad debt among China’s banks. As such, the government is actually opening up new avenues for banks to discharge this bad debt as opposed to endlessly rolling it over on their balance sheets.
In addition to the government stepping up and taking on a portion of the bank’s debt, the country is now developing a market that will see Chinese banks trading asset-backed securities and non-securitized loans in order to unload their balance sheets.
After the market process plays out, it is likely the government will have to pick up some of the slack as the amount bad debt among financial institutions in China is commonly thought to be worse than is said. As such, the government may rely on asset-management companies that were set up at the end of the 90s, giving these groups the resources needed to buy questionable debt.
Local governments have also been given the power the set up these companies, but, given local governments themselves are indebted a great deal in many cases, only one such province has taken advantage of the power so far.
At the same time China sorts out its internal financial strife, it’s looking to restrict those very same investors who poured cash into Chinese banks in 2004-2008. In addition to complying with their own country’s capital rules, banks will have to meet Chinese capital rules as well, though the amount of a bank both foreign investors and firms might own stands unchanged.
The country’s own banks are getting even more of a break though in line with other liberalization that has taken place, continuing a trend of letting domestic firms work more freely as the Chinese marketplace hopes to become more robust internally. The country will now allow local governments to invest in banks, removing capital requirements for financial institutions looking to establish a bank as well as both removing restrictions on ATM branches and the number of branches one can apply to open at a time.
As the country allows firms to become more competitive in this way, its previous ending of the minimum lending rate could become more relevant for Chinese consumers. Ideally, the country is hoping for more banks, more loans to consumers, and more cash flow into the economy from its people as China continues to both open its markets and plan for the future.