China Modernizing Its Financial System

Published on Author geeker

Last summer, the Chinese government lifted restrictions on lending rates and its recently announced planned removal of the bank deposit rate ceiling, which is seen as the last and most significant government restriction on interest rates, is the last obstacle the country must overcome until interest rates are completely liberalized. Both of these actions are signs of China’s attempt to transition into a market-based economy.

On Tuesday, Chinese officials also announced their intent to establish the country’s first privately owned official banks.  China has 12 “joint-stock” banks with private capital owning 41 percent on average, but the 5 planned non-state banks, which will be located in Shanghai, Tianjin, Guangdong and Zhejiang, are slated to be completely owned by private investors. Although a list of investors has not been made public, Alibaba and Tencent topped the list of the 10 Chinese companies interested in investing.

Opening the banking system up to greater competition by liberalizing interest rates and establishing private banks is only a small step towards modernization, but analysts are welcoming the development. It will be interesting to see how China’s shift towards a market-based economy will affect the global economy in the coming years.

Source: NY Times

3 Responses to China Modernizing Its Financial System

  1. It will be interesting to see how China reacts when their markets continue to become more and more free. More specifically, when the private banks grow in numbers and size. If the US is any indicator about how these banks will do, they will only grow in size. How China reacts to this growth will be interesting, especially as I would imagine, they try to limit the growth of these private banks.

  2. I like to see China encouraging the development of privately-owned banks. I think it would benefit the country if the central government were to continue to gradually reduce its control/influence over the economic activity within China.

  3. This is indeed potentially important. One question is what form privately-owned banks will take, and whether the current “informal” lending markets can be formalized. Small businesses can and do borrow money, but doing so in an informal manner increases costs and risks for both sides of the transaction.
    Removing deposit caps is also quite important, as small savers faced rates negative in real terms. That of course increases the attractiveness of real estate, gold and anything else that might appear to offer a better return. Unfortunately in a growing economy even things with have a Ponzi-scheme component (gold) can do well for a long time, which can lead to disastrous investments in a country that lacks decades of experience with financial markets. As you note though this is at present merely “planned.”