Beijing Sets Meek Tone on Reform to Banking Sector Amid Uncertainty

09.01.2012 10:32

WSJ: BEIJING—A top level meeting of Chinese policy makers to discuss China's financial sector ended with few signs Beijing is gearing up for the type of sweeping reforms sparked by such meetings in the past.

New policies could still emerge in the coming days, and the meeting, which ended Saturday, may set the tone for changes in the coming months. But analysts say that with Beijing facing an uncertain global outlook, regulators and top officials seem to be reluctant to push major changes in the way the financial sector and financial firms operate.

China's banking sector served the country well during the global financial crisis, when Beijing turned to the banks to fund the country's economic stimulus efforts, and as limits on capital controls kept the banks largely insulated from the turmoil overseas. But cracks are appearing and Beijing is increasingly aware that the current system—which favors state-owned companies over the private sector—doesn't always serve the country's long-term interests.

A statement posted on the website of China's State Council, the country's cabinet, after the conference ended cited Premier Wen Jiabao as saying that the difficult global outlook makes the need to address problems in China's own financial system all the more urgent. "The global financial crisis is not yet over...and we must think of danger in times of safety," the statement cited Mr. Wen as saying. "Our financial sector still has obvious problems and potential risks."

Mr. Wen ran through a familiar list of problems with China's financial sector, calling for small businesses and remote areas to be better served by financial companies, for stock market investors' rights to be better protected, for the country's foreign exchange reserves to be better managed and for vigilance against risks arising from local-government debt. He didn't include any specific measures.

Moreover, the statement didn't mention interest-rate liberalization, which some analysts expected to be on the agenda and many say is the key financial challenge Beijing needs to confront in the coming years. Beijing has been gradually giving financial institutions more freedom to set interest rates, but the major remaining hurdle—letting banks determine for themselves what deposit rate to offer customers—could well be the most difficult.

Powerful vested interests stand to lose from such a change, including the massive state-owned enterprises that benefit from drawing on the banks for cheap loans. Such far-reaching reforms also tend to entangle regulatory agencies in turf wars, drawing out the consultation process behind the scenes.

The first conference, held in 1997 in the wake of the Asian financial crisis, led to a plan to remove billions of dollars in bad debt from the balance sheets of the major banks. The 2002 meeting led to hastening the reform of those banks, resulting in the eventual overseas listing of Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. The 2007 conference led to the establishment of China Investment Corp., the country's sovereign wealth fund.

The debate over what China does with its foreign exchange reserves is more pressing now than the last time the conference was held. China's foreign exchange reserves were $3.2 trillion at the end of September, up from $609 billion at the 2007 meeting. Still, Mr. Wen's boilerplate comments on foreign exchange give little indication of whether changes in how the funds are invested might be in the offing.

What to do with the reserves has repeatedly gotten caught up in regulatory wrangling. CIC, the wealth fund, has been waiting for a capital injection for about two years, and a plan to spin off CIC's investments in China's state-owned banks into another body has been under debate for over a year.

"The major question surrounding this week's finance conference will be how bureaucratic turf battles in the financial sector are settled—if they are settled at all," Nicholas Consonery, an analyst with research firm Eurasia Group, said in a note to clients on Friday.

—Rose Yu and Aaron Back contributed to this article.
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