Think Tank Drafts Financial Reform Plan

Analysts and industry insiders have been calling for deepened financial reform to guarantee healthy and stable economic growth.

Their appeal seems to have been answered in a development plan released on Sunday by the Development Research Center of the State Council, a think tank of the central government.

In the plan submitted to the Third Plenum of the 18th Communist Party of China Central Committee scheduled for November, the think tank lays out a three-phase roadmap for China's reforms. Financial reform includes building a diversified financial system with supportive private financial institutions, internationalization of the renminbi in a decade, and establishing a deposit insurance system, Xinhua reported on Sunday.

"China is on the course of readjusting its economic structure and transforming growth patterns. We need to strengthen financial reform to fuel the real economy, and we need prudent monetary policy to support the reform, and give out reform dividends," Ma Delun, vice-governor of the People's Bank of China, said at the 10th China International Finance Forum in Shanghai on Sunday.

A deposit insurance system helps to strengthen public confidence in small financial institutions and allocate their savings effectively.

"The entry of private capital into the financial sector will improve this industry, increase capital supply, and thus relieve the financing pressure for small and medium-sized enterprises," Ma added.

Li Jian'ge, chairman of Shenyin & Wanguo Securities, said that a key point of financial reform lies in loosening regulations on the financial sector.

The current approval processes that financial institutions must undergo are complicated, hinder financial innovation, and can lead to corruption and abuse of power, Li said.

Global economists and investors have kept a close watch on financial reform in China. There have been heated discussions on speeding up the process of the yuan convertibility, liberalization of interest rates and capital accounts.

Wang Tao, an economist at UBS, said that maintaining controls on short-term capital flows protects domestic financial institutions against external shocks. "I am a very strong reformer except for capital flows, and that should not be equated to pro-reform or anti-reform," she said.

Analysts also warned of financial risks on the backdrop of slower economic growth.

Chang Jian, an economist and analyst with Barclays Research, said that "rapid new loan growth and expansion of the shadow banking sector in the past couple of years have increased systemic risks, which also points to the need to tighten liquidity".

He estimated that total debt has reached more than 200 percent of GDP, driven by increased indebtedness among inefficient state-owned enterprises and local governments.

Implicit government guarantees and soft budget constraints have created a significant moral hazard, an underpricing of credit risks and excessive borrowing, which may lead to the potential for defaults, bankruptcies and non-performing loans in the banking system, Chang said.