Why the plenum critics have got it wrong

Updated: 2013-11-22 10:34

By Luo Jiexin and Xue He (China Daily Europe)

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Economic document offers a lot of promise for significant reform and restructuring

Many observers have expressed disappointment at the pace of financial reforms outlined in documents issued after the Party's Third Plenum, saying they do not devote enough space to financial reform and fail to deliver any breakthroughs.

We disagree.

First, to say there has been no breakthroughs is simply wrong.

In fact, the document outlines at least two long-awaited reforms. One is that private investors will be allowed to set up small and medium-sized banks, and the other is that a registration system for IPOs is being advocated as a replacement for the existing approval system.

The importance of these changes cannot be overestimated. Allowing private banks to be set up, though initially they will be small, means authorities are serious about breaking the state monopoly in banking. The move will greatly improve market efficiency and the allocation of financial resources, help alleviate small business' shortage of capital and may be a boon for depositors and individual investors.

The first time a top Chinese leader openly criticized the monopoly of state-owned banks was in April last year, when former premier Wen Jiabao said in response to private business owners' complaints over the difficulty of raising funds: "Regarding raising funds for your businesses, I think it has been too easy, quite frankly, for our banks to make profits. The reason is that a handful of large banks are in a monopolistic position. It is only from them, and nowhere else, that companies get the loans they need."

Since then, the idea of private banks has been put back on the government agenda, with many private companies, big or small, saying they are willing, or have applied, to be among the first to venture into private banking. Although details of regulations governing private banks are yet to be made public, the direction is clear. Mentioning private banks in such an important document means this is something that will be done; it's only a matter of when.

Similarly, replacing the IPO approval system with a registration system will fundamentally change the stock market. The move will reduce corruption, help companies go public and make it easier for companies, especially small ones, to gain access to the capital market.

While the ideas on introducing systems for registering private banks and IPOs are not new, including them in the Third Plenum document means that debate over the two issues is over and it is time to implement them.

The document calls for government bond yields to better reflect the market. It also says a deposit insurance system will be set up. Admittedly, calling for action on these two matters is not new either, but it is clear that authorities are building a foundation for more reforms.

The government bond yield curve aims to supplement, if not replace, benchmark rates imposed by the central bank. It will give the market another set of indicators that it will recognize.

The deposit insurance system is apparently a prelude to scrapping the official deposit rate ceiling, the last big step in liberalizing interest rates.

As for other financial reforms in the document on things such as foreign exchange and the capital account, it is true that few new ideas have been floated.

But this may not necessarily be a bad thing, because this could mean that a consensus has been reached on these issues so there is no need to spend a lot of time and space writing about them.

The consensus is that major financial reform will be advanced slowly but steadily, with the proper controls.

Given that the government has adopted a raft of financial reforms since last year, such as widening the yuan trading band and dropping the floor lending rate, and the fact that it has retained the reformist central bank governor, Zhou Xiaochuan, we are confident that financial reform will go ahead to help with economic restructuring.

The authors are Shanghai-based analysts. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 11/22/2013 page7)