China walks a tightrope when it comes to financial sector

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Illustration: iStock

A simple, seven-letter word illustrates China’s financial sector which is going through a rapid period of seismic change. Yet finding the right balance is proving to be elusive as the government grapples with a daunting array of problems.

So far, Beijing has rolled out a raft of policies to curb corporate debt, check a ballooning “shadow banking” industry and stem capital outflows while promising to open up further to foreign financial firms.

At times, this appears to resemble a tightrope artist crossing the Three Gorges Dam while juggling a couple of executive boardroom chairs.

Even the International Monetary Fund issued a veiled warning about the challenges ahead at the end of last year.

“The system’s increasing complexity has sown financial stability risks,” the IMF stated in the China Financial Sector Stability Assessment report.

“A reluctance among financial institutions to allow retail investors to take losses; the expectation that the government stands behind debt issued by state-owned enterprises … and efforts to stabilize stock and bond markets in times of volatility [as well as protecting] funds for various financial institutions, have all contributed to moral hazard and excessive risk-taking,” it added.

The People’s Bank of China, or central bank, is well aware of the “risks” after a senior official called for closer scrutiny of the financial system at the weekend

Xu Zhong, the head of the PBOC’s research department, indicated that Beijing was unlikely to merge its banking and insurance regulators or upgrade its oversight structure by creating a super-regulator.

“In the current environment of frequent financial chaos, we should strengthen the central bank’s overall role,” he was quoted as saying in the Chinese financial magazine Caixin. “There is a lack of uniform regulation of the same financial products,” Xu added.

Apart from overhauling the regulatory system and tightening sectors, such as online banking, the government is also committed to further opening up the financial sector to foreign competition.

Last year, Zhu Guangyao, the vice-finance minister, outlined broad plans to increase access to this multi-trillion dollar market.

The latest changes included raising the limit on overseas ownership in joint ventures involved in the futures, securities and funds markets to 51% from 49%. Still, the foreign business community has reacted cautiously to the decision.

“Opening up financial services further have been high on our list,” Ken Jarrett, the president of American Chamber of Commerce in Shanghai, said at the time. “It’s a step in the right direction. [But] in China you always have to pay attention to the fine print to see how quickly it moves.”

During the past decade, investment banks in the United States and Europe, particularly the United Kingdom, have struggled to gain more than a foothold in the world’s second-largest economy.

A survey compiled by the Reuters News Agency from data supplied by China’s Securities Association found that the average sino-foreign joint-venture lost 21 million yuan a year (US$3.3 million) in a 10-year period up 2014.

How that has affected overseas investment in the country’s financial sector, such as banks, insurers and securities firms, is difficult to gauge. In 2017, the figure came in at $11.37 billion, according to State Administration of Foreign Exchange, or SAFE, without fleshing out the details.

Indeed, behind these big-picture numbers lurk concerns about whether Beijing will carry through its ‘open door’ pledge.

“Given China’s weak adherence to earlier World Trade Organization (WTO) rules on the financial sector, the question is: ‘How serious will China be about the new policy?’” Andrew Collier, an independent macroeconomic researcher in Hong Kong, asked in a commentary for Foreign Policy, a US news publication.

“Whether China takes this financial opening seriously will have a significant impact on its relations with the United States,” he went on to say. “American skeptics [point out that] China has not lived up to its previous promises in the WTO to allow foreign access to its financial markets.

“Foreign commercial banks comprised about 2% of China’s market share in 2006 when China adopted new rules five years after its WTO accession,” Collier added. “That share has since fallen to a relatively insignificant 1.3%. Given past experience, there are a number of roadblocks in the way of foreign entry, including institutional, financial and cultural issues.”

“Roadblocks” that China will eventually have to move as it re-calibrates the financial sector and finally balances the scales when it comes to overseas competition.

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