Finance sector set for overhaul

China will undertake many changes in banking and finance, including granting lenders more control over lending and interest rates, in a drive to deepen reform, Premier Li Keqiang said in his work report to the annual parliamentary session on March 5.

The nation will also establish a deposit insurance system, a key move in carrying out financial reform, according to Li.

"We will establish a deposit insurance system and improve the risk reduction mechanism of financial institutions," said Li.

Deposit insurance has many important implications for China's financial markets, such as maintaining stability, said Pan Gongsheng, deputy head of the People's Bank of China.

Pan said the central bank is pursuing interest rate liberalization as planned, and the next target is to free up deposit rates. The timing of that move, Pan said, depends on the macroeconomic landscape and the results of other financial reforms.

It is not certain that deposit rate liberalization will happen this year, Pan said.

Analysts have said that introducing a deposit insurance system is a precondition for freeing up deposit rates, the last and most important phase of interest rate liberalization.

China has made significant progress toward liberalizing interest rates.

Two steps took place last year. In July, the PBOC removed the floor on loan rates and in December, it announced guidelines for a pilot program involving interbank trading of negotiable certificates of deposit.

This year, the PBOC has made several moves related to interest rate liberalization specifically in the China (Shanghai) Pilot Free Trade Zone. One step was to end the interest rate cap for small foreign-currency accounts.

"Although interest rates in China have risen recently, generally speaking, domestic interest rates are below the market-clearing level," said Wang Tao, chief economist with UBS Securities in a recent report.

"Thus, even if interest rates climb, credit demand and expansion may be stable."

The rapid development of Internet financial services since June 2013 reflects the regulators' positive attitude toward such financial innovations, particularly because they have served to accelerate interest rate liberalization, force banking sector reform and offer households higher returns to their savings, said Jian Chang, analyst with Barclays Research in a note.

"Internet financial services have been a catalyst in pushing up funding costs and changing banks' asset and liability management," said Chang.

Li also said deepening financial reforms have many aims, such as promoting the establishment of privately backed small and medium-sized banks and other financial institutions, maintaining the yuan's exchange rate at "an appropriate and balanced level" and expanding its floating range, and moving toward yuan convertibility under the capital account.

China will also advance reform by establishing a system of shelf registration for equity issues and promoting the sound development of Internet finance, said Li.

Xinhua contributed to the story.

wuyiyao@chinadaily.com.cn

(China Daily Africa Weekly 03/07/2014 page8)