Zhou's Jibe at ‘Lazy’ Banks Signals China More Open for Business

  • Financial sector isn’t exempt from opening: PBOC Governor
  • Overseas investment banks still hampered from market access

People’s Bank of China Governor Zhou Xiaochuan said China should forge ahead to further open the financial services industry, in a signal the country may allow foreign firms greater access to the market.

Protecting domestic firms from outside competition makes them lazy, which weakens them and may lead to financial instability, Zhou said Tuesday at the Lujiazui Forum, an annual gathering in Shanghai that the central bank is co-hosting with the city’s mayor, Ying Yong.

"Financial sectors are no exception" in terms of opening-up, as competition brings "pressure, dynamism, progress and prosperity," Zhou said. "High leverage, low capital and non-performing loans shouldn’t be tolerated, but being closed and having no competition often give way to low standards."

Zhou’s stance against financial protectionism signals that the pace of opening will accelerate, and that officials, chastened by outflows since the 2015 yuan devaluation, are shifting focus from opening the capital borders toward more opening of the financial services industry and capital markets, according to Liu Li-gang, chief China economist at Citigroup in Hong Kong.

Overseas investment banks that want to operate in China are limited to owning minority stakes, and have been largely excluded from lucrative businesses such as secondary-market trading in Chinese debt and equities, as well as from managing money for wealthy clients. Since UBS Group AG and Goldman Sachs Group Inc. established Chinese joint ventures more than a decade ago, foreign banks have struggled to challenge local players.

"Learning from this lesson, the authorities have shifted their strategy towards opening China’s financial markets for greater foreign participation, which will help accelerate China’s market developments," Liu said in a note Tuesday. "Once China has a sophisticated financial and capital market, the capital account liberalization will be a natural consequence."

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, who in December decided to exit a minority-owned Chinese investment-banking joint venture, said in a Bloomberg Television interview this month that the U.S. bank is patiently negotiating with Chinese regulators to find a new structure that would eventually give it full control.

Greater Openness

China’s finance sectors have benefited from greater openness and should take further steps in that direction, Zhou said, citing progress made by domestic financial institutions in the global bond and equity markets. Officials have been signaling greater openness since at least last year, and had considered measures including allowing joint-ventures with foreign ownership permission to expand into areas beyond stock and bond underwriting.

"The more open and competitive the industry is, the faster companies can make progress," Zhou said, and cited the development of the country’s manufacturing industry as an example to show positive outcomes brought by openness and competition.

Zhou added that opening-up can "catalyze policy changes," and that the government has already made trade more convenient, reduced capital controls, and given markets more weight in determining the yuan’s exchange-rate.  

"The centrally-planned policy making system had been challenged" during the opening-up, and it triggered a series of major reforms on pricing, taxes, and trade in China, he said.

International Footprint

China’s Belt and Road Initiative, a grand plan to boost global trade and investment proposed by President Xi Jinping, has also created new opportunities for domestic financial firms to expand their overseas footprint and enhance international cooperation, he said.

Speaking after Zhou, Shanghai Mayor Ying said the financial hub will push ahead with capital account convertibility trials and boost cooperation with the offshore yuan centers, adding that the city will continue preventing regional and systemic financial risks.

Wang Zhaoxing, vice chairman at the China Banking Regulatory Commission, also said the nation shouldn’t halt financial reform and innovation because of a few difficulties.

Bank capital adequacy is still at a "high level" of more than 13 percent, while non-performing loans remain at "low level," said Wang, who urged stronger coordination of regulation, deleveraging and risk control.

— With assistance by Yinan Zhao, and Miao Han

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