China waits for 'suitable time' to liberalize rates
By Hu Xiaocen |
May 11, 2012, Friday
|
Print Edition
Print Edition
CHINA is on a slow, careful path to deregulate interest rates. Some analysts say that process should be accelerated now as the nation's economy is slowing. But that raises questions anew about whether domestic banks are ready to be thrown to the wolves of market forces.
People's Bank of China Governor Zhou Xiaochuan said in an interview with Caijing Magazine last month that China is still waiting for a "suitable time" to allow market forces to play a bigger role in setting interest rates.
"It is difficult to promote reforms when inflation is exacerbating because that will likely pull up prices and lead to dissatisfaction among the public," Zhou said. "The global financial crisis has yet to calm down. The domestic market faces an economic slowdown. The government is waiting for a suitable time to act."
Singapore-based DBS bank suggests the "suitable time" is now.
The lender noted in a report released two weeks ago that liberalizing interest rates in Finland, Norway and Sweden and removal of loan quotas caused a surge in lending in the Nordic countries.
"Although lending in China may end up rising or falling, to be safe, an ideal time to liberalize interest rates would be when the economy is slowing down," DBS advised.
Reforms in the Chinese commercial sector have been slowly underway for some time. But are the banks strong enough in management and risk assessment to withstand modern market forces?
Net interest income at China's "Big Four" - the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China - accounted for 73.6 percent of their operating income on average in the first quarter, down from 82.9 percent in 2008, when China first started relaxing credit controls.
Still, that is a high ratio compared with foreign lenders operating in overseas markets who derive more of their income from intermediary businesses.
A switch in income structure is one of the major challenges facing Chinese lenders, DBS said in its report.
Short-term pain
"Interest rate liberalization forces banks to give up implicitly guaranteed net interest margins," DBS noted. "Banks must be willing to give up short-term profit guarantees in exchange for higher asset quality on their books over the medium- and longer-term. It is uncertain whether they are ready to accept such short-term pain."
Money market rates in China are set by a mix of government regulation and market forces. Interbank rates and bond yields were liberalized in the late 1990s, while retail deposit and lending rates are generally set by the PBOC.
"Reform is a huge, systematic change that requires reasonably ordered arrangements," the central bank governor said.
Such caution draws on lessons from the past, when market forces have caught up with bad banking policies.
Ba Shusong, deputy director of the Finance Institute of the State Council's Development Research Center and chief economist of the China Banking Association, told a banking forum that interest rates liberalization may have led to the failure of savings and loan institutions in the 1980s in the United States.
"One of the reasons triggering the crisis was management inability and inexperience in evaluating the new risks and speculative opportunities introduced by the increasing rates," he said.
"On the other hand, Japan's transition was stable because that nation introduced special protection for small and medium-sized financial institutions to avoid collapses on a large scale."
Ba said the reform will change the structure of the whole banking industry, with the fittest surviving and the weakest going to the wall.
Competition baptism
"For lenders it is a baptism into real competition," he said. "They can no longer stay under the umbrella of the old system but must force themselves to enhance their risk management capabilities. Price competition will eventually dilute market concentration and bring down the big lenders from their dominant positions."
There are those who think interest rates should not be the principle focus of banking reforms in China right now.
Justin Lin, chief economist at the World Bank, said last week before the annual China-US Strategic and Economic Dialogue that allowing the licensing of more small- and medium-sized banks might provide more benefits to the economy.
"China should open smaller banks to provide funding to small- and medium-sized enterprises," Lin said. "Liberalization of rates does little to help manufacturing and agricultural businesses. It's important to put the country's internal needs ahead of others."
The task of opening up the banking sector to global practices is inevitable if China wants to become a major world financial center.
If the past is anything to go by, the process will be measured to ensure the least disruption to the nation's economy.
People's Bank of China Governor Zhou Xiaochuan said in an interview with Caijing Magazine last month that China is still waiting for a "suitable time" to allow market forces to play a bigger role in setting interest rates.
"It is difficult to promote reforms when inflation is exacerbating because that will likely pull up prices and lead to dissatisfaction among the public," Zhou said. "The global financial crisis has yet to calm down. The domestic market faces an economic slowdown. The government is waiting for a suitable time to act."
Singapore-based DBS bank suggests the "suitable time" is now.
The lender noted in a report released two weeks ago that liberalizing interest rates in Finland, Norway and Sweden and removal of loan quotas caused a surge in lending in the Nordic countries.
"Although lending in China may end up rising or falling, to be safe, an ideal time to liberalize interest rates would be when the economy is slowing down," DBS advised.
Reforms in the Chinese commercial sector have been slowly underway for some time. But are the banks strong enough in management and risk assessment to withstand modern market forces?
Net interest income at China's "Big Four" - the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China - accounted for 73.6 percent of their operating income on average in the first quarter, down from 82.9 percent in 2008, when China first started relaxing credit controls.
Still, that is a high ratio compared with foreign lenders operating in overseas markets who derive more of their income from intermediary businesses.
A switch in income structure is one of the major challenges facing Chinese lenders, DBS said in its report.
Short-term pain
"Interest rate liberalization forces banks to give up implicitly guaranteed net interest margins," DBS noted. "Banks must be willing to give up short-term profit guarantees in exchange for higher asset quality on their books over the medium- and longer-term. It is uncertain whether they are ready to accept such short-term pain."
Money market rates in China are set by a mix of government regulation and market forces. Interbank rates and bond yields were liberalized in the late 1990s, while retail deposit and lending rates are generally set by the PBOC.
"Reform is a huge, systematic change that requires reasonably ordered arrangements," the central bank governor said.
Such caution draws on lessons from the past, when market forces have caught up with bad banking policies.
Ba Shusong, deputy director of the Finance Institute of the State Council's Development Research Center and chief economist of the China Banking Association, told a banking forum that interest rates liberalization may have led to the failure of savings and loan institutions in the 1980s in the United States.
"One of the reasons triggering the crisis was management inability and inexperience in evaluating the new risks and speculative opportunities introduced by the increasing rates," he said.
"On the other hand, Japan's transition was stable because that nation introduced special protection for small and medium-sized financial institutions to avoid collapses on a large scale."
Ba said the reform will change the structure of the whole banking industry, with the fittest surviving and the weakest going to the wall.
Competition baptism
"For lenders it is a baptism into real competition," he said. "They can no longer stay under the umbrella of the old system but must force themselves to enhance their risk management capabilities. Price competition will eventually dilute market concentration and bring down the big lenders from their dominant positions."
There are those who think interest rates should not be the principle focus of banking reforms in China right now.
Justin Lin, chief economist at the World Bank, said last week before the annual China-US Strategic and Economic Dialogue that allowing the licensing of more small- and medium-sized banks might provide more benefits to the economy.
"China should open smaller banks to provide funding to small- and medium-sized enterprises," Lin said. "Liberalization of rates does little to help manufacturing and agricultural businesses. It's important to put the country's internal needs ahead of others."
The task of opening up the banking sector to global practices is inevitable if China wants to become a major world financial center.
If the past is anything to go by, the process will be measured to ensure the least disruption to the nation's economy.
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
