Chinese Government: Time for More Private Banks

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China is increasingly approaching growth through a more free financial sector―a means to generate cash flow to small and medium sized businesses as the country reaches for a powerful bout of domestic consumption amid a changing economy. Most recently, the country plans to introduce more private banks to help refocus its economic direction.

After removing the floor of lending rates, China has yet to do the same for the deposit rates, something which the government is considering as a part of broader reform efforts. The removal of the lending rate floor was designed to allow lenders to compete for the first time — ultimately with the hope that it will result in lower rates for businesses and enterprises looking for cash. This method would be an alternative to past years of growth where the Chinese government played a more active role in the expansion of firms, resulting in growth that was perhaps not accurately reflected by market demand.

One of the government’s current goals is to promote consolidation among firms and local governments, the latter of which could have substantial amounts of bad debt left over from the years of stimulus pushed out by the Chinese government. By freeing up financial institutions, and now greatly boosting private banks, the country will look for its local governments to securitize debt and let private capital take the onus off of Beijing to be responsible for one hundred percent of their debt.

Yet, the deposit rate remains untouched as the ruling forces in China are still cautious to seriously approach the matter. With the Chinese population being devout savers, but having limited options of doing so, the deposit rate remains the most commonly tapped form of investing available to the average citizen. But with a maximum deposit rate of 3 percent put in place by the government, and lending rates starting at 6 percent, the divide between the two has placed tensions on the larger economy.

Still, there remains hope that the government will move down this path, as Wang Tao, an economist at UBS in Hong Kong, wrote in a research note, “Removing lending rate restrictions is an important symbolic move, which signals the government’s intention to move forward with interest rate liberalization. The next and more important step is, of course, the ceiling on deposit rates. The central bank considers the removal of the deposit ceiling as the most critical yet most risky move in interest rate liberalization.”

In addition to eliminating some taxes for small businesses to drive growth, as well as a moratorium on government administrative buildings in order to control costs, the government will look for its new swath of private banks to make China’s marketplace more dynamic. According to comments from the government’s website, “We will actively develop small-sized financial institutions and open up the channel for private capital to enter the financial sector. We will promote trials by private capital to initiate the establishment of private banks responsible for their own risks, as well as financial leasing companies and consumer finance companies and other financial institutions.”

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