AT FIRST sight, China seems to have a superb banking system. Its state-controlled banks, among the biggest and most profitable in the world, have negligible levels of non-performing loans and are well capitalised. That appears to suggest that the country’s approach should be applauded.
Excess of caution
China’s new leaders have acknowledged that the old approach has led to excesses, notably overcapacity in state industries. They are talking of allowing more private (but not foreign) investment in the financial sector and are urging banks to lend more to private firms. That is not enough.
For a start, China should end financial repression. If deposit rates were gradually freed, banks would be forced to compete with each other for depositors and free to win back customers now lost to the shadow banking system. Most Chinese banks have no clue today about customer service, risk management or credit assessment. That would have to change. Miserable returns on bank deposits encourage punters to plough money into real estate and other riskier investments, so paying decent deposit rates might help prick the property bubble, too.
Second, China needs to go beyond banking. In many developed economies, non-bank firms and financial markets vie with banks to issue credit, but in the Middle Kingdom（哈哈，一贯的冷哟） banks still dominate. In recent years Chinese firms raised nine times as much money from banks as they did on the country’s stock exchanges. The corporate bond market has grown quickly of late (and big banks no longer gobble up most of the offerings). This growth should be encouraged.
Third, China must separate banking from crony state capitalism. The best way to do this is privatisation. 继续鼓励和提倡私有化Smaller banks like China Merchants and China Minsheng, in which private investors have significant stakes, lend much more energetically to small businesses and households than do the state-controlled goliaths. Privatising the Big Four would help（哇哦？！）, though it would make it harder for the state to manage any future banking crisis. And as long as sheltered, oligopolistic SOEs exist, banks will lend disproportionately to them because they enjoy implicit state backing. So the big SOEs must themselves face greater market discipline.
Finally, China should welcome competition, from abroad and at home. Two Chinese internet giants, Tencent and Alibaba, are starting to provide wealth management, investment funds and other financial services. Banks are lobbying against them. Regulators worry about the destabilising effect of start-ups with new business models, but for newcomers that do not pose a systemic risk they can afford lighter-touch regulation.
None of these changes should happen overnight. They can be implemented gradually. But a bit of disruptive innovation would be good for China’s stodgy banks, and its people.