China’s need for opening up of financial market highlighted by demise of Baoshang Bank
- The Chinese government was forced to step in and hand the control of the small Inner Mongolian bank to the China Construction Bank
- Investors and analysts fear deteriorating health of small banks despite the central bank’s assurance that the failure is an isolated case
China is pushing ahead with its vow to open up its US$44 trillion domestic financial sector to foreign investors at a time when creditworthiness of some Chinese lenders is sinking, highlighted by the government's takeover of the troubled Baoshang Bank.
The central bank has already said that it will back a pilot programme in Shanghai to remove the foreign ownership limit on firms providing securities and fund management services, while the local government in the northern municipality of Tianjin said in May that it will remove the foreign ownership caps for Tianjin-based Chinese banks and financial asset management companies.
The Tianjin government also said it would support overseas banks in setting up both branches and subsidiaries locally, and encourage them to engage in yuan-based business.
The acceleration of the opening of the domestic financial markets comes at a time when numerous smaller banks are at their most fragile, analysts said, with China needing foreign capital as its financial sector has accumulated a mountain of debt lent to cash-strapped companies and loss-making projects.
But China’s priority on maintaining financial stability, and its stringent capital controls preventing a free flow of capital out of the country, shows that the process of liberalisation remains constrained, the analysts said.