• Sat
  • Aug 23, 2014
  • Updated: 5:28pm
BusinessChina Business
REGULATION

China to step up reform of financial sector

Explosive growth of Alibaba's online money market fund prompts state to quicken action

PUBLISHED : Thursday, 20 March, 2014, 1:35am
UPDATED : Thursday, 20 March, 2014, 5:16am

A top mainland official says the world's second-largest economy is set to quicken the pace of financial reform to address increasing demand from consumers, after the People's Bank of China announced it would liberalise deposit rates in one to two years.

"The emergence of Alibaba's Yu E Bao online money market fund has prompted the authorities to speed up reform in the financial sector, which is a critical part of the economic reform," Li Jiange, a vice-chairman of state-run investment company Central Huijin, told a forum in Hong Kong yesterday.

"Historically, China's reform processes are primarily driven by external forces and new competition. In today's world, it is the rapidly growing internet finance that stirs the liberalisation of the deposit rates and financial reform."

Yu E Bao, which offers annual interest rates of 4 to 6 per cent, had attracted more than 81 million investors since its launch in June last year.

The explosive growth sparked a controversy, with vested interests in the banking sector condemning the online platform for distorting interest rates, prompting further questions about whether little regulated online financial products are innovative or destructive to the state-dominated banking system.

The PBOC has issued two drafts for consultation aimed at cracking down on internet finance by limiting online shopping and money transfers for online-payment service providers, according to media reports.

"Without taking decisive reform measures, the outlook for China would be discouraging," Li said.

Liu Minyan, an associate managing director at Moody's, said the key reforms planned for the mainland's financial markets, including the opening up of the banking sector, deregulation of interest rates, introduction of a deposit insurance scheme and implementation of new fiscal initiatives for the banking sector, could come about in five to 10 years, if executed well.

Liu said deposit-rate deregulation would add to banks' funding costs, and consequently put pressure on net interest margins.

State-owned lenders have long enjoyed huge profits and near monopolistic power, thanks to the government-controlled interest rates that fuelled the country's fixed-asset-investment-led growth model.

Li said this year would be a "watershed year for China to determine the future of the reform process for the next 10 years".

"The planned agenda of the central government needs more courageous moves in order to be fully implemented, otherwise the reform items will only amount to youthful idealism," he said.

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