Asiabizblog - Business and Law for China and Asia

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January 2, 2006

Chinese Banking Reform - Another Perspective

Further to our discussion of the Chinese state banks. In "Banking Crises in East Asia: The Price Tag of Liberalization?" -- on the policy implications of economic liberalization -- Ilan Noy asks whether Chinese bank reform can succeed, concluding:

Important questions include: (a) whether the institutional arrangements governing the newly founded regulatory agency are adequately robust to withstand liberalization; (b) whether the regulatory agency has the institutional knowledge and political power to successfully regulate a post-liberalized banking sector; and, most significantly, in light of the author’s arguments, (c) whether the banking sector’s profit margins are sufficiently wide and balance sheets healthy enough to withstand increasing competition from more profitable foreign banks. These are especially pertinent questions considering the previous painful and costly experiences in East Asia in 1997–1998. The answers to these questions will be of vital importance to the health of the Chinese economy and the region in general in years to come.

It is clear that the Chinese banking sector can be successfully liberalized and the danger of a banking crisis averted only if banks’ balance sheets are carefully monitored and the monopoly power enjoyed by the leading banks is dismantled slowly. This, of course, implies that the December 2006 deadline to finish the liberalization process [imposed by WTO agreements] is woefully inadequate.