China’s chief banking regulator plans to more than triple the amount of capital a new bank must pay to secure a prized onshore operating license.
Under the new rules, set to be finalized on 30 October, foreign banks entering China for the first time will need to pay an up-front charge of Rmb1 billion ($163 million), an increase of Rmb700 million, even before opening their doors.
Critics rounded on the new rules, outlined by the China Banking Regulatory Commission, which will hit smaller foreign lenders yet to enter the world’s second largest economy. They accused China of protectionism, and of lacking the courage to press ahead with bold and much-needed financial reforms.
“It’s yet another way of ensuring that foreign banks are operating in the mainland on an unlevel playing field,” says Andrew Polk, resident economist in Beijing at The Conference Board’s (TCB) China Center for Economics and Business. “Mainland banks are widely viewed as unhealthy and badly run, and China’s leaders are afraid of exposing them to excessive outside competition.
Recent attempts by Beijing to push through financial reforms have also met a mixed response. Consultants at Capital Economics described the recent launch of the Shanghai Free Trade Zone (FTZ) as “underwhelming”, noting that it actually reduced Shanghai’s ability to compete financially with Hong Kong, London or New York.
While China’s leaders trumpet the new zone as vital to the creation of a thriving onshore financial services hub, sucking in investment from foreign insurers, banks, and brokers, others dismiss it as another example of Beijing’s timidity.
The TCB’s Polk views the zone and the higher bank levy as a classic case of the government sending mixed messages. “We’ve seen it all before,” Polk said. “It’s a sop, a veneer of reform. They launched the FTZ so they don’t have to undertake the fundamental financial reforms that are so desperately needed.”
China’s financial sector stands at a crossroads. Speaking at the annual IMF conference, economist Nouriel Roubini tipped the economy to suffer a “harder landing”, with gross domestic product slowing to 6% by 2014. That will hit China’s lenders, exposed to rising levels of soured debt held by state enterprises and local government bodies.
Yet China needs a strong, competitive banking sector in order to rebalance its economy. That can only happen if Beijing successfully liberalizes deposit rates and interest rates, allowing banks to stand on their own feet.
And that, experts say, is where the fear creeps in. “As soon as China liberalizes interest rates, it will create a race to the top, with banks competing for customers,” shredding net interest margins, says Li-gang Liu, chief China economist at ANZ in Hong Kong. If badly managed, that process “could easily lead to a systemic financial crisis in China”.