Research team on “China’s Financial Reform Strategy”, Research Institute of Finance, DRC 2016-02-24

One of the major issues for China’s financial reform is interest rate liberalization, which plays a key role in improving the financial services of real economy. At present, interest rate liberalization has entered a critical phase. Interest rate can increase by 50% based on deregulation of interest rate. The Research Institute of Finance of DRC has conducted field surveys in over 20 provinces and cities in the eastern, central and western regions since 2014. The research findings show that different-sized banks across China have made different responses to interest rate liberalization. The pressure facing national big banks is relatively light, while pressure facing small banks is relatively heavy. Therefore, we should implement supporting approaches to advance the reform. It is revealed through field survey that interest rate liberalization has exerted a heavy impact on small banks around China. With regard to current system and environment, some of the small banks have difficulties to keep sustainable development, and the reasons are: 1. The pressure of losing deposits is relatively heavy. 2. The room for making profits is shrinking. 3. The capability of professional service is insufficient. 4. Information technology has aggravated the Matthew Effect. All the above-mentioned facts are attributed to the lack of scale effects for small banks. The crux of the matter is the high cost of absorbing savings due to insufficient credits. It is suggested that we should adopt comprehensive measures to guard against the fact that many small banks would go bankrupt. On one hand, we should reduce the pressure facing small banks to be squeezed out of the market. On the other hand, we should straighten out M&A mechanism to decrease the impact of squeezing small banks out of the market. Through improving the mutual credit mechanism among small banks, M&A channels of banking sector and relevant laws and regulations relating to the close-down of banks, we should resolve the insufficient credits issue, strengthen the organization, realize the risk sharing and improve societal credits to decrease the cost of absorbing savings.

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