OPINION> OP-ED CONTRIBUTORS
Key to reform financial system
By Yao Yang (China Daily)
Updated: 2009-08-27 07:50

China has an underdeveloped banking system with relatively low-quality service, but the system might be blamed most for its lack of small- and medium-sized banks (SMBs) and regional capital markets.

Even during the ongoing global financial crisis, the Chinese State-owned banks have recorded excellent performance. But their mighty power to make huge profits is due to their monopoly roles and lack of competition from the SMBs.

In sharp contrast with the figures of 7,500 commercial banks, 886 loan-deposit associations, 400 mutual saving banks and 9,900 credit unions in the US, China has only 18 main commercial banks and 110-odd city commercial banks.

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If SMBs come into being, they will be more inclined to offer loans to small- and medium-sized enterprises (SMEs), which will help ease the latter's long-time financial difficulties.

In recent years, China has achieved a savings rate exceeding 50 percent while the domestic investment ratio is only 42 percent. It's abnormal that savings amounting to 10 percent of the annual GDP are lying idle while so many SMEs remain mired in financial woes.

However, such an imbalance can hardly be changed when the State-owned banking giants dominate the banking industry as their abundant capital can bring high returns by extending loans to big enterprises.

Compared with the big banks, the SMBs will be more likely to grant SMEs loans, for though SMBs may have much less funds but are more flexible in operations that can stimulate SMEs' growth towards eventually fueling domestic investment and increasing job opportunities.

The vacuum of regional capital market is another serious deficiency.

Each of China's provinces is almost as large as some countries in terms of population and area, but the country has only two stock markets - in Shanghai and Shenzhen - with altogether only 1,500-plus listed companies.

Even taking the initial Growth Enterprise Market into account, the capital market is not of a scale befitting the nation. Furthermore, there is no bond market for enterprises, not to mention other forms of financing.

The lack of regional capital market results in frequent illegal fund-raising incidents that disrupt the money market and cause the victims great losses.

However, we need to see through those deceptions. They reflect the longing of a large number of private SMEs for huge investment, as well as dreams of the common people to achieve more with their idle money.

If SMEs are allowed to enter the bond market, illegal fund-raising will naturally decrease while the common people can earn more with their money.

The financial market should not only play as an investment intermediary, but also serve as an important means of redistribution of the gains wrought by rapid economy growth. A reform of the financial system will help people gain more with their capital investment.

When China's banking industry has already opened its doors to foreign banks, it's unfair to set up so many barriers for domestic private capital.

It's true that promoting higher levels of private investment may bring more risks to the financial system. But it's also not right to throw the baby out with the bathwater. The correct choice is to build an effective regulatory system for monitoring the banking sector.

In the 1990s, the regional capital markets made a great leap forward but failed eventually because of the absence of both matching laws and a supervisory system.

Now it's urgent that China initiate a momentous structural adjustment to balance the economy. The government should not miss this precious opportunity to improve our banking system as it did in the 1990s.

The author is a researcher of the Research Institute of National Development, Peking University.

(China Daily 08/27/2009 page8)