2014 Financial Reform: The Road to Marketization and Breaking Monopoly

**Core Insight**: Financial reform has entered a critical phase, focusing on the capitalization of capital prices, the adjustment of an imbalanced financial structure, and the breaking of monopolies in inclusive finance. Substantial progress was made in 2013, and further breakthroughs are anticipated in 2014. Since the Third Plenary Session of the 18th CPC Central Committee, financial reforms have once again captured market attention. On January 22, 2014, the first public meeting of the comprehensive deepening reform leading group, headed by President Xi Jinping, outlined six special groups, including one focused on economic and ecological system reforms. Financial reform under this framework is now top-down designed. Earlier, on November 15, 2013, the Central Committee issued a decision to "improve the financial market system," marking a clear direction for reform. Currently, financial reform is centered on capital price liberalization, structural adjustment, and breaking the monopoly in inclusive finance. Interest rate marketization, deposit insurance systems, insurance fund reforms, private bank liberalization, and shadow banking regulation have all seen significant progress in 2013 and are expected to continue in 2014. **Marketization of Capital Prices** The Third Plenary Session of the 18th CPC Central Committee emphasized the need for further marketization, with the market playing a decisive role in resource allocation. Interest rates and exchange rates are key indicators of capital pricing. Industry experts anticipate accelerated progress in both interest rate and exchange rate liberalization. Interest rate liberalization began with the removal of interbank lending rate caps, followed by full deregulation of lending rates, though deposit rates remain partially controlled. The central bank has outlined a three-step plan: enhancing banks' pricing capabilities, expanding market-based liability pricing, and ultimately achieving full interest rate marketization. Recent developments, such as the Interim Measures for Interbank Deposits and ongoing deposit insurance policy preparations, suggest that progress may be faster than expected. Exchange rate marketization involves refining the RMB exchange rate mechanism and gradually liberalizing capital controls. With the RMB's appreciation and increased floating range, the path toward capital account convertibility and internationalization is becoming clearer. Deposit insurance and bank bankruptcy mechanisms are also being developed to support this transition. **Breaking Monopolies and Adjusting Structure** A major theme of 2013 financial reform was breaking monopolies and addressing structural imbalances. Private banks saw renewed momentum, with policies allowing private capital to establish small and medium-sized banks. At the 2014 Banking Regulatory Work Conference, Shang Fulin reiterated plans to expand private capital participation, starting with pilot projects. While entry barriers have been lowered, strict standards on risk control and integrity remain in place. Private banks still face challenges due to incomplete supporting systems, such as deposit insurance and bank bankruptcy laws. However, with these frameworks improving, private banks are expected to grow significantly. Analysts predict a potential increase of 100 new private banks by 2018, contributing to greater competition and improved financial services. **Shadow Banking Regulation** Addressing the imbalance in the financial system, the government has taken steps to regulate shadow banking. The State Council issued guidelines to separate wealth management business and establish dedicated financial management organizations. The CBRC has also introduced reforms to centralize wealth management operations and restrict interbank activities to head offices. Although shadow banking remains a complex issue, regulatory efforts are intensifying, signaling a shift toward a more transparent and stable financial system. In summary, China’s financial reforms are progressing steadily, with a focus on marketization, competition, and stability. These changes aim to create a more efficient and resilient financial system that better serves the economy and the public.

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