China should rethink its finances to funnel funds to cash-starved private enterprises and keep its banks healthy.
The country’s banking system is straining to finance the rapid urbanisation of the world’s most populous country.
Pressure on bank earnings and capital ratios is ratcheting higher as politically directed loans to state-owned enterprises and local governments turn sour.
China has already made tweaks this year; such as removing lending-rate restrictions, raising the quota for qualified foreign institutional investors from $80 billion to $150 billion, and turning parts of Shanghai into a free-trade zone.
But the reluctance of foreign banks to open in Shanghai’s experimental zone suggests drastic steps need to be taken.
Cutting red tape by reducing the state’s approval power would help. The government should also roll back its ownership of banks and encourage new entrants to promote a culture of commercially based lending.
It should also quickly develop the country’s capital markets to wean companies off an over-dependence on bank loans.
Other measures, such as a deposit insurance scheme for failed lenders, liberalisation of deposit rates and allowing foreign companies to list in mainland China would together help keep china’s growth on track in the long term.
Of course, China biggest banks will fight back. Reformers will have to overcome powerful vested interests and China is a far more complex economy than when Deng Xiaoping unleashed root and branch change at a Communist Party gathering in 1978.
The results of the ongoing Third Plenum will take months or even years to truly become apparent: government at all levels will take time to digest the reforms. Much rides on President Xi Jinping’s ability to push through change.