Is China Seriously Considering Privatizing its Banks?

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BEIJING (TheBlaze/AP) — China on Friday promised sweeping changes to its state-run banking system — including allowing the creation of private lenders — to support its credit-starved entrepreneurs and curb what regulators worry are growing financial risks.

Analysts including the World Bank say an overhaul of a Chinese banking system that lends little to the private sector is urgently needed to keep economic growth strong. Communist leaders who took power last year have promised to support entrepreneurs who generate China’s new jobs and wealth, but have yet to make significant changes.

Friday’s statement outlined an array of areas where Beijing is promising action but gave no details or a timetable.

In a joint announcement, the central bank and banking regulators repeated earlier pledges to make interest rates and other aspects of banking more market-oriented – a move analysts say is required to channel more credit to productive activities. They pledged to increase lending to small and medium-size companies.

“We will make attempts to allow private capital to initiative the setup of financial institutions including banks,” the statement said. It gave no indication how that might take place.

Such a change will be politically fraught because China’s financial system is the ruling Communist Party’s most powerful tool in controlling the economy and supporting politically favored state industry.

“We do not think this will lead to a significant near-term change in the banking sector, but we do view it as a step in the right direction,” said Nomura economist Zhiwei Zhang in a report Friday.

The leadership is not expected to make major policy changes until after a party meeting in the autumn to decide on long-range strategy.

Friday’s announcement comes amid signs China’s lackluster recovery from its deepest slump since the 2008 global crisis might be faltering.

Economic growth decelerated to 7.7 percent in the first quarter from 7.9 percent the previous quarter. May retail sales fell short of forecasts and export growth slowed. A survey by HSBC Corp. showed June manufacturing activity fell to a nine-month low and was contracting.

Forecasts call for growth this year of 7.5 to 8 percent, barely half of 2009′s explosive 14.2 percent. Reformers warn it could fall as low as 5 percent by 2015 without drastic changes.

“The financial system is safe and sound overall, but the problem of capital misallocation still exists and is not in alignment with the need for economic restructuring,” the government statement said.

The proposed changes were meant to “better embrace the market’s fundamental role in allocating resources” and “mitigate financial risks,” it said.

Is China Seriously Considering Privatizing its Banks?

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The latest promise of changes came as Chinese financial markets were recovering from a credit shortage that caused a spike in interest rates paid by banks for loans from other institutions. The crunch eased after the central bank injected money into that market but analysts expect credit to be scarcer than it was previously.

The central bank is trying to cool a credit boom that it worries might run out of control. Credit grew 15.8 percent in the five months through the end of May, well above the central bank’s target for this year of 13 percent.

The central bank and the bank regulator also said they will tighten control on some banking activities to reduce risk. That includes limiting use of “wealth management products” – bundles of credit card and other debt sold by banks to investors who want a higher return on their savings.

Financial analysts worry such products might be too risky for small savers. Regulators worry they allow banks to shift some of the debts they are owed off their books, allowing them to lend more and evade government-imposed credit limits.

Is China Seriously Considering Privatizing its Banks?

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Friday’s statement promised to limit banks’ use of wealth management products and prohibit them from charging hidden fees.

Earlier Friday, a deputy finance minister said the government needs to stay alert to the financial risks of companies set up by local governments to invest in building highways and other infrastructure.

A rise in debt owed by such companies as part of Beijing’s effort to fend off the 2008 global crisis by pumping up infrastructure spending has fed concern state banks might face a wave of defaults. Government auditors have said potential risks can be controlled.

“We admit candidly that we still face challenges,” said Zhu Guangyao, a deputy finance minister, at a government briefing. “We need to stay alert to the risks but we also are confident in the general situation.”

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