Yesterday the National Development and Reform Commission announced that foreign banks would be allowed to bring in $24 billion in borrowed funds into China in 2012. This helps address a potential short-run problem of concerns about capital outflows, but it is part of a much larger trend of substantial financial reforms visible over the past 5 months. In the Fall, the top leadership of the China's securities, banking, and insurance regulators were changed. The most important personnel switch was to replace CSRC commisioner Shang Fulin with Guo Shuqing. Shang was moved over to head the banking regulatory commission, replacing retiring Liu Mingkang. Zhou Xiaochuan, who will likely conclude his tenure as Governor of the People's Bank of China next March, has also continued to sound reformist.
Since last Fall, a long list of financial reforms have been issued; each is individually minor, but together they are pretty substantial.
- Allowing further experiments with issuance of municipal government bonds.
- Liberalizing the issue process for corporate bonds.
- Create a common over-the-counter (OTC) trading platform.
- Expand the quotas for Qualified Foreign Institutional Investors (QFII).
- Permit greater private lending to small- and medium-sized enterprises in Wenzhou, as well as make it easier for Wenzhou businesses to invest overseas.
- Further gradual appreciation of the Renminbi.
Drop by drop, the growing list of individual financial reforms has gotten folks thinking that even bigger and more important reforms are on the horizon, namely a liberalization of interest rates and a more complete opening of the capital account. Authorities are at once discussing these possible measures and tamping down expectations.In the past, announcements of major financial reforms have always been sudden, for example, with the scrapping of Foreign Exchange Certificates in 1994 and unpegging the Renminbi from the dollar in 2005.
Nick Lardy, in his new book, Sustaining China's Economic Growth after the Global Financial Crisis, argues that interest rate liberalization is the cornerstone of any serious economic reform plan going forward. Determining when interest rates will be reformed involves a lot of guess work. Reforms would force the gap between deposit and loan rates to narrow, putting pressure on banks. Also, the country's overall debt levels are still high, and interest rate reform could add to the debt obligations of banks. However, Chinese banks currently are enjoying record profits and perhaps could endure the shift to more liberalized interest-rate environment.
The spate of financial reforms also is pushing people to wonder whether we are on the eve of broader economic and political reforms. Usually, such reforms do not come at the end of a Central Committee's term, particularly when many of the members of the Politburo will be replaced. In the past new leaders have taken 1-2 years to get settled before implementing substantial changes. But there are already signs that a list of reforms is being contemplated, including: greater support for the private sector and reduction of state-owned enterprises' administrative monopolies, greater autonomy for business associations, hukou reform, liberalization of the education system, and government restructuring.
Are we on the precipice of major reforms or will the tinkering of the last few months lead to...more tinkering? At this point, it is still anyone's guess.
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