Scholars Grapple over Opening up Banking to Private Investors

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Last updated at: (Beijing Time) Thursday, December 19, 2002

Scholars Grapple over Opening up Banking to Private Investors

Heated debate is going on in China on whether to open up the banking sector to private investment and how.

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Heated debate is going on in China on whether to open up the banking sector to private investment and how.

There are on the whole two opposing groups: One advocates to lift up the protective fence around State-owned commercial banks and let in private investors immediately, or at least roll out some pilot programs; the other however suggests holding it for a longer while, citing the immature condition and the ensuing potential pitfalls with private investors' entry.

The two sides wrangle mainly on the following several points:

First, whether to break down the current monopoly by the State-owned commercial banks and maneuver a plot of ground to private investors.

"The reason for the ineffectual banking reform over the past years is not that complicated," Xu Dianqing, a tenure professor with the University of Western Ontario of Canada, was quoted as saying by the Beijing-based China Business Times. "Without touching State banks' existing property rights and their monopoly of the domestic banking sector, all reforming efforts are nothing but the blind dash within a confined castle."

As is committed to the World Trade Organization, China is gradually opening up its banking sector to overseas investors, for example allowing them to run business using the local currency and set up branches in the hinterland besides the coastal cities.

But domestic private investors are still denied the admission.

This is a serious inequality, infringing upon the fundamental principle of financial integration, Xu said.

But defenders attribute State-owned commercial banks' inefficiency to their faulty corporate governance, which usually results in nobody's concern about their gains and losses.

After diversifying the equity-holders of State banks by introducing more investors into them, a reshuffled equity structure (of course, the State will control the bulk share), combined with the standardized corporate governance, will surely change State banks market behaviors, according to them.

But critics simply point out one fact: There so far has not appeared a healthy corporate governance within a bank with the State controlling the whole or bulk share.

Who should steer: market or government?

Second, should the under-discussion banking reform be led by the market power or the governmental direction?

For those who side with market, the government-initiated banking reform is like to walk along a one-end tunnel, which not only has no way out but also easily falls into the manipulation by the vested interest.

"Once controlled by the vested interests, the financial reform, regardless of whatsoever measures, will surely swerve away from its intended direction," Xu said.

Complaining that State-owned banks prefer in most cases to serve large State and private firms, some experts are crying for private banks' joining to satisfy medium-and-small firms' capital demand.

The People's Bank of China, the central bank, has nodded this bidding, but holding that private investors' involvement should first start from joining in the local branches of the four State-owned commercial banks, the rural credit cooperatives or the city merchant banks in different areas.

Since 1997, the four State-owned commercial banks - the Bank of China, the Industrial and Commercial Bank of China, the Agricultural Bank of China and the Construction Bank of China - gradually retreat their grass-roots branches in counties and countryside to reduce their operational cost.

The central bank hopes the rural credit cooperatives and the city merchant banks, organized on the basis of the urban credit cooperatives, would take up the vacuum left by the four State commercial banks' withdrawal.

But all the remaining local branches of the four State banks, the rural credit cooperatives and the city commercial banks are suffering much either from a high ratio of non-performing assets or from an obscure property right.

The central bank wishes private capital's involvement will change the mechanism of the local banking system and bring them to life again.

"To attach policy obligations to the private investors (of banks) will once again distort the relationship between the banks and the government, luring the banks to rely on the government for special policies or subsidies instead of making profit on their own," said Lin Yifu, a famous economist with the China Center for Economic Research at Beijing University.

How about rebuilding a new one?

Third, is now a good timing for a systematic financial innovation?

Gradualists think China should wait and see for another while, fingering at the immature opportunities for launching a complete banking reform.

Admitting that now might not be a perfect time for an all-around breakthrough, opponents don't think China should sit back and shelf the research and experiment of franchising private banks.

"If we don't move now, we might miss our chances and get bogged down in worse circumstances afterwards," Xu said. "An overhaul of China's banking sector is a task that can afford no more delay."

Last, are the private banks creditable?

Getting accustomed to the Sated-owned and government-backed banks, both the ordinary masses and the government officials are habitually on high alert against private banks.

"Private banks were not the hideous devil if we could look at them not through the prejudice-tinted spectacles," Xu said.

"What's really fundamental is promoting China's financial institutional innovations before emancipating the private banks, especially the researches on private banks' entry and exit and the regulations about them."

Some other critics have gone even farther - to bulldoze the whole existing banking system and rebuild a new one.

Their rationale for this: Considering the chronics suffered by the State banks, putting up a new banking system may prove cheaper than tinkering the old one.

Therefore, a simple and fundamental cure might be to deregulate the banking sector, letting all banks compete freely and the excellent ones stand out naturally.

Such an advice sounds too radical in the eyes of both the government and the gradualist banking reformers.

"This is a kind of delirium," Xu said. "As the heart of the whole economy, banks cannot stop operating for even a day. So, how can they be pulled down and reconstructed?"

By PD Online Staff Forest Lee

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