Faster financial reforms

Had the game-changing YU'EBAO not come from nowhere to shake up the Chinese banking sector so vehemently, Chinese policymakers may have taken more time to weigh and implement all-important financial reforms.

However, after this Internet-based financial product, created by China's largest e-commerce company Alibaba to compete for deposits with traditional banks, attracted 500 billion yuan ($82 billion) in just months, Chinese policymakers could hardly afford to wait any longer.

Although the jaw-dropping amount of deposits Yu'ebao has so far absorbed still pales in comparison with the banking sector's deposits of tens of trillions of yuan, the enthusiasm it ignited among tens of millions of small-pocket Internet users for a wealth management service, a service big banks reserve for the wealthiest of their customers, has made the country's financial reforms more imperative than ever.

That is why it is particularly encouraging to hear central bank governor Zhou Xiaochuan say that liberalization of deposit rates will likely be realized within one to two years. If so, such an earlier-than-expected timetable to implement the last step in interest rate marketization suggests there is strong resolve by the leadership to put financial reforms on the fast track.

By easing controls on interest rates paid on bank savings, Chinese leaders will fulfill part of their promise to give market forces a "decisive role" in allocating credit and other resources.

The benefits of the latest reform are all too obvious for the public. If banks compete for deposits by paying higher rates, more money will be put into the pockets of Chinese families who will then increase their spending to spur economic growth.

However, the challenges for the banking sector will indeed be tough.

The narrowing gap between interest rates that they pay for deposits and collect from loans means traditional banks will have to fight harder for shrinking profit margins.

Worse, the rapid integration of Internet technology and financial services may eliminate a number of jobs in traditional banks.

The banking sector may want more time to adjust to these fundamental changes. But the Chinese authorities are suggesting fast moves because technology will not wait and, more importantly, it is time to deepen reform.

(China Daily 03/12/2014 page9)