The document released last week after the Chinese Communist Party’s central committee plenum suggests two things.
The one is that opposition to financial reforms remains huge. The other is that top policymakers are trying to make some changes to pave the way for future breakthroughs.
As some market observers have pointed out, the document, in general, lacks new substance in terms of financial reforms.
There are two crucial, long-awaited measures. One is that private investors will be allowed to set up small and medium-sized banks. The other is that the registration system for initial public offerings will be pushed to replace the much-criticized approval system. As a legacy of the concept of labeling the government as a manager instead of a service provider, the approval practice has been lambasted for creating a hotbed for rent-seeking.
These two moves have the potential to change the financial sector fundamentally. Allowing the establishment of private banks, though they will be small in size in the initial stage, means authorities are keen to shatter the state monopoly in the sector. The move will greatly enhance market efficiency, improve the allocation of financial resources, help alleviate capital shortage among small businesses and possibly bring better benefit to depositors and individual investors.
Similarly, replacing the IPO approval system with a registration system will also fundamentally change the landscape of the stock market. The move will reduce rent-seeking, facilitate companies to go public and make it easier for companies, especially small firms, to access the capital market. That said, both private banks and IPO registration system are not new ideas as they were mentioned in previous documents.
The idea of private banks, for example, had been initiated and seriously discussed by authorities more than a decade ago. And the establishment of China Minsheng Bank showed that the government had once tried to break the state monopoly in the banking sector. But the later development proved that the bank was just another duplication of the state system, with the government keeping a tight grip on the bank that was funded by many large private companies.
The idea was put on the shelf since then until it was flung back to the table this year. But still, despite top leaders’ promise of deregulation, details on how a private bank can be set up are difficult to deliver.
The IPO registration system, too, was much talked about for quite a few years, with both Guo Shuqing and Xiao Gang, former and sitting chairmen of China Securities Regulatory Commission, vowing to make the system take root in the country.
To be frank, therefore, having private banks and IPO registration system in the document is not a surprise at all. What’s more, without a specific timetable, these two reforms can take some time.
For the rest of financial reforms such as those related to foreign exchange and capital account, the document just repeated what previous government documents have said, by using rather vague words such as “further enhance” and “continue to promote”.
All these indicate that a consensus has not been reached among departments as to the goal of the financial reform and at what speed it should progress. One of the points of debate is to what extent controls should be maintained on the capital account.
Clearly, interest groups want to continue to reap gains from the existing system that features industry monopoly, rate setting and capital controls.
But there are positive signs to show top policymakers are moving toward more market-oriented approaches.
The Third Plenum document urges improvement in the government bond yield curve that can reflect demand-supply relationship of the market. It also promised to set up a deposit insurance system. The two points were not new either, but they showed that authorities were building a foundation for further reforms.
The government bond yield curve is aimed at supplementing, if not replacing, the benchmark rates now set up by the central bank. It will give the market another set of yardstick indicators that are expected to be recognized by the market itself.
The deposit insurance system is apparently a prelude for scrapping the official deposit rate ceiling, the last major step in interest rate liberalization.
Considering that the government has adopted a raft of financial reforms since last year, such as widening the yuan trading band and dropping the floor lending rate, it is expected that financial reforms will go ahead – but not at a quick pace.
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