China opens up its banking sector to private investors

28th May 2012

Wang Xiaotian of the China Daily says the guideline released by the commission states that private companies can buy into banks through private stock placements, new share subscriptions, equity transfers, mergers and acquisitions.

And private investment is also welcomed in trust, financial leasing and auto-financing companies.

"The banking regulatory branches at different levels cannot set up separate restrictions or additional conditions for private capital to enter banking sector. And they are obliged to improve transparency of the banking market access constantly," the CBRC said.

"I'm very pleased to see the authorities encouraging and guiding the private capital to invest in the banking sector. The threshold of the financial industry certainly should be higher due to risk concern, but there should be clear and transparent access standards that could be applied to all kinds of investors," said Guo Tianyong, director of the Research Center of the Chinese Banking Industry at Central University of Finance and Economics.

"Otherwise, private capital would always be blocked or bounced back by an unseen 'glass door'," he said.

The move comes in line with other recent measures announced by the central government to stimulate the domestic economy while at the same time opening more State-owned enterprises (SOEs) to private investment.

And these moves according to Gordon G. Chang of Forbes Magazine, signals a reversal of a half decade of anti-reform sentiment.

"China, in short, is open for business, and there is no mystery surrounding the sudden change of attitude."

"First, many cite the eroding profitability of state enterprises for these announcements.  In fact, official figures show that their profits fell 8.6% year-on-year in the January-April 2012 period."

"Second, other factors include the decline of foreign direct investment-FDI fell for the sixth consecutive month in April-and a dramatic slowdown in economic activity-the economy showed signs of either zero growth or contraction last month."

"Third, Beijing technocrats realize they will fall far short of reaching their target of 36 trillion yuan of fixed asset investment because the central government can only "channel" 402 billion yuan and state enterprises are sitting on their hands.  The inescapable conclusion is that the only way to make up the difference is private capital."

Moreover, last week's edition of The Economist argues that lifting the barriers to private investment, will allow the Chinese to use its capital more wisely and stop fed up savers, miserable with returns on their deposits from seeking alternatives abroad.

But as exciting as the past week's announcements are, there is still skepticism that much will change anytime soon. As Gordon Chang puts it:

"In any event, central government ministries, if they were truly serious about liberalization, would just implement structural changes as opposed to talking about them. Until there is a sign he is serious this time, many will think Premier Wen Jiabao is borrowing from his 2010 playbook when he had his State Council grandly announced similar reforms that were not put into effect with real rules."

"And there is one more factor suggesting private capital will not rescue the Chinese economy this time. As domestic and foreign investors learn more about both the fundamental and cyclical problems in China, it will be increasingly unlikely that anyone will commit substantial sums to the country."


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Should investors be worried by China's slow down?

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