China is set to revamp its financial sector

CUSTOMIZED SERVICE: Zhang Hong (center), customer relations manager at Zhejiang-based Taizhou Bank, visits a clothing shop owner to discuss his financing needs on March 18. The bank has rolled out new services to meet the financial needs of small and micro-sized enterprises (HAN CHUANHAO)

As China looks to transform its growth model, the country recently laid out guidelines to ensure that the financial sector supports its economic rebalancing efforts.

The State Council issued a 10-measure guideline for the financial sector on July 5. The governing body reiterated that it will maintain a prudent monetary policy and a reasonable money and credit supply to support economic restructuring after a cash crunch sent interbank borrowing rates to record highs in June.

It also pledged to press ahead with financial reforms and strike a balance between stabilizing economic growth, adjusting its economic structure and guarding against financial risks.

"China's economic operation is generally stable but there are outstanding structural problems. A misallocation of capital is challenging the country's financial system," the guideline stated.

The guideline covers many areas of the financial sector and calls for channeling credit to the real economy—the part of the economy that is concerned with actually producing goods and services, as opposed to the buying and selling in capital markets and inviting private capital to the financial sector.

The China Banking Regulatory Commission (CBRC) was mainly responsible for drawing up the guideline, having consulted with the People's Bank of China (PBOC), the country's central bank, China Insurance Regulatory Commission, China Securities Regulatory Commission and 13 government departments. It also solicited opinions from local governments and experts.

Li Huiyong, an economist at the Shanghai-based Shenyin Wanguo Securities, said that the guideline illustrates China's resolve to focus on stabilizing economic growth and shift away from the days of easy credit.

Funding the real economy

As money flocks to the more profitable property sector and financial markets, not enough is left for the real economy. Total social financing surged 50.2 percent to 9.11 trillion yuan ($1.48 trillion) during the first five months of the year, according to the PBOC.

Wei Jianing, Deputy Director of the Macroeconomic Research Department at the Development Research Center of the State Council, said the problem is not a lack of capital by itself, but a dearth of capital available for the real economy.

"Private companies and innovation-driven enterprises, which stand for the future of the economy, can't get enough financial services and loans," he said.

To this end, the regulation says that the central bank will help financial institutions ensure that credit is available for small enterprises, the agricultural, advanced manufacturing and information technology sectors, as well as labor-intensive industries. However, credit will be curbed in sectors with overcapacity and credit risks for the property sector will be more strictly monitored.

It also says that banks' wealth management products should be connected to real economy projects. With the right guidance, several trillion yuan of wealth management products will fund the real economy, according to analysts.

Wealth management products are short-term investment vehicles sold by banks to the public, offering rates above the State-mandated 3-percent savings rate. The interbank borrowing rate spike in June partly stemmed from funding wealth product payouts promised at the end of each month, said analysts.

"Chinese Premier Li Keqiang has repeatedly called for the banking sector to revitalize its stock of capital and make good use of incremental capital. A vital part of that is to inject funds from wealth management products to the real economy, instead of letting it rotate only among banks," said Lu Suiqi, Deputy Director of the Finance Department at Peking University.

At the Lujiazui Forum held in Shanghai at the end of June, CBRC Chairman Shang Fulin said that there is 8.2 trillion yuan ($1.37 trillion) in wealth management products as of the end of March and 70 percent of them have been used in the real economy. But Lu disagrees.

"The 70 percent includes funds that flow to the property sector. If we exclude that part, we can see that very little flows into the real economy," said Lu.

"Many wealth management products don't have a clear direction of usage. No institutions can calculate how many of them flow toward the real economy except the regulatory agents," a source from a wealth management institution told Beijing Morning Post.

But the CBRC is working on the issue. It has issued a series of regulations on banks' wealth management products, including controlling the total amount, managing the usage of funds and guarding against risks. The next step is to link wealth products to real economy projects, establish a separate account for those products and offer open and transparent information about them.

Small and micro-sized enterprises are a vital part of the real economy, as they offer considerable employment opportunities. But they are also the most vulnerable in a slowing economy.

There are about 51 million small and micro-sized enterprises in China, but only 10 million of them can get bank loans, said Huang Yi, director of the CBRC's Supervisory Rules and Regulations Department.

"Small and micro-sized enterprises face lots of difficulties in financing, stemming from factors such as a lack of credit history," said Huang, who adds that the new guidelines will make it easier for those businesses to qualify for loans.

Courting private capital

Inviting private capital to the financial sector entails doing three things: encouraging private capital to participate in the restructuring of financial institutions; allowing mature and prudently managed rural banks to adjust the shareholding ratio within a certain degree; and encouraging private capital to establish financial institutions that shoulder responsibilities and risks by themselves, such as private banks, financial lease firms and consumer finance companies, according to the guideline.

During the three decades after China's reform and opening up in the late 1970s, the monopoly of the banking sector by state-owned commercial banks has never been fully broken down. Right now, private capital is searching for investment channels but is stifled in many ways.

"The State Council issued a 36-clause policy that allows private capital to the traditionally monopolized financial sector," said Jia Wolong, Chairman of the China Estate and Merchant Cooperation Association. "With mounting outcry from the general public to allow room for private banks in China, the guideline once again mentioned it. This showed a firm resolution from the Central Government to give the green light to open private banks. In 2013, maybe some private banks will emerge in the financial markets and people are really looking forward to it."

Bi Jiyao, Director of the International Economics Institute of National Development and Reform Commission, hailed the government's efforts to invite private capital into the financial sector.

"China's capital-thirsty small and medium-sized companies will find it easier to access loans once private capital sets up financial institutions."