Financial reforms to squeeze Chinese banks

Interest rate liberalisation and freer capital flows are the prime candidates for financial reform this year. But there will be negative shocks on Chinese bank margins.

Given the importance of financial stability, Beijing will only take a gradualist reform approach. It will only allow limited freedom for domestic investors to invest overseas via the Qualified Domestic Institutional Investors QDII scheme. Hence, do not expect any acceleration in full capital account convertibility, and Hong Kong stocks will not get a boost from Mainland money just yet.

Bolder financial reforms on the way

Beijing has decided to spin off the PBoC's role of regulating banks to an independent agency, the China Banking Regulatory Commission. The PBoC now focuses on central-bank functions in setting monetary policy.

Splitting the central bank's duties helps lessen the conflict of interest -...

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