Careful handling required

The government should prevent the creation of too many private banks within a short period of time to limit potential risks In the document unveiled after the Third Plenary Session of the 18th Communist Party of China Central Committee, it was once again stressed that China will open its State-monopolized financial sector wider to the outside, and qualified private capital will be given a green light to set up small and medium-sized financial institutions, with the precondition of tightened supervision.mini storage Under a policy warm-up, 36 private banks have reportedly gained approval from the State Administration for Industry and Commerce for their names. To allow for the establishment of private financial lenders is a demonstration of the government's determination to push forward financial reforms, and will help adjust the structure of the country's imbalanced financial market. However, considering long-standing government concerns over the possible repercussions of financial reforms, increased policy support and ever-growing non-governmental enthusiasm do not change the fact the government should open its State-owned financial sector in a gradual manner, as how to defuse possible risks and how to orientate private banks are the two biggest challenges to opening the financial sector to private capital. In the absence of a national deposit insurance system and well-conceived regulations on bank bankruptcies, it is a major concern to the country's financial authorities that any rush to withdraw cash from less-powerful private banks or any bankruptcy will have a domino effect and trigger the widespread collapse of the whole banking credit system. The mainland can learn from Taiwan's experience. Public banks dominated Taiwan's banking sector before the 1990s. But the Taiwan authorities revised the banking regulations in 1989, lowering the threshold for the entry of private banks. Although very harsh conditions were set for the establishment of private banks, that did not dampen the enthusiasm of private capital. In 1991 alone, a total of 16 private banks were approved. However, this rapid openness to private capital caused a dramatic decline in profit margins, which subsequently led to the worsening of private bank assets and a continuous rise in their financial risks. Taiwan's experience highlights the necessity of the mainland opening its State-owned financial sector in a gradual manner and this is also the only viable way to defuse financial risks. The lack of ideal effects in Russia, Hung迷你倉ry and other countries that once pushed for the full suspension of limitations on the establishment of private banks within a short period of time should also strike a cautionary note. Due to their weaker advantages in controlling risks, capital expansion and transregional operation capability, private banks will be in a difficult position competing with the financially stronger State-owned lenders. Private banks should take aim at local regions, such as villages, towns and communities, and offer services to borrowers related with agriculture or small and micro-sized enterprises. Such a business orientation is in line with the central government's decision to improve the national financial market system and reverse its financial structural imbalances. The United States' experiences in this respect are a worthwhile reference for China. A majority of 7,000 banks in the US mainly belong to community banks with assets of less than $1 billion each, but loans issued by them to small firms account for nearly 40 percent of all bank loans. Community banks prove to have played an important role in promoting the US economy and employment. Taking a long-term perspective, the entry of private capital to the banking sector remains an irreversible trend in China, and it is an important part of the country's pending financial reforms. Despite the suspension of some long-standing policy limitations, however, the government should not push for the establishment of private banks at too fast speed to prevent the creation of too many private banks within a short period to avoid fierce competition and the decline of their profits, which will possibly lead to the soaring of non-performing assets. It should also refrain from setting an excessively high capital threshold for private banks to prevent them from being burdened with heavy funding pressures right from the start. Also private banks should be directed to orient their business toward serving local firms and offering financial support to local industrial development. To bring financial risks under control, the authorities should also push for the establishment of related financial systems as soon as possible, to effectively fend off and defuse possible high risks in the process of the establishment of private banks and offer an exit mechanism for bad-performing banks to prevent the spreading of risks to the whole financial system. The author is a professor with the School of Economics and Management, Beijing University of Science and Technology. 文件倉