China’s Next Reform: Private Banking

Published on Author Asher
PBOC Headquarters

To follow up on Bloomer’s post regarding China’s currency valuation (the CNY will now be allowed to fluctuate up and down by as much as 2% per day against the USD), China is undertaking some other serious financial reforms under President Xi Jinping. Former Prime Minister Wen Jiabao said over two years ago that Chinese banks “earn profit too easily … because a small number of large banks have a monopoly,” and that the only solution was more private capital in banking. Mr. Xi seems to agree, as on March 11th five private banks were approved to be opened across the nation (currently all banks are state-owned, and more likely to lend to state-owned businesses).

The announcement follows Tencent and Alibaba’s ventures into internet finance, and fittingly these two internet giants have been among the chosen investors. Among the reasons for welcoming the liberalization of the banking industry is that, through caps on interest earned on accounts, the Chinese were essentially subsidizing banks’ lending to their preferred corporations. Now, China’s central bank has announced these caps, too, will be phased out by 2016.

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3 Responses to China’s Next Reform: Private Banking

  1. Very interesting to see China slowly deregulating their banking system. It will be interesting to see which, if any, previously established model of banking China chooses to follow. With the recent failures of banking systems in the United States and Europe, it will be interesting to see if China produces a safer, more responsible banking policy. Although with China’s dodging record on fiscal policy, I would not be surprised to see an aggressive and risky banking structure emerge.

  2. Jargon: financial repression. See other posts / comments on the side effects, and of course I’ve mentioned this issue repeatedly in class. Artificially holding down returns on deposits in a capital-scarce economy generates “shadow” lending and favors large borrowers while hurting small savers.

  3. I am pleased to see China’s initiative to encourage private banking. I think it is a step in the right direction in progressing China’s economy away from its Communist roots. Such action will serve to encourage entrepreneurial endeavors within the nation, if it becomes the case that not only state-owned enterprises stand a chance to receive substantial business loans.