by+Zi+Mo

The year 2015 marks an impor- tant milestone in the history of Chinas financial reform. At the beginning of this year， Chinese Premier Li Keqiang chose WeBank， the countrys first private online bank， as the first stop on his 2015 inspection tour， a sign that Chinas financial market is opening wider to private capital and internet firms. At the Third Session of the 12th National Peoples Congress （NPC） that just concluded in Beijing， Premier Li declared that China will “establish a deposit insurance system” and “move ahead with financial reform to better serve the real economy”this year in the Report on the Work of the Government. All of this evidences that Chinas financial reform has merged into the fast lane.

Deposit Insurance System

An integral part of Chinas financial reform， a deposit insurance system is expected to be established this year.

Deposit insurance is a measure implemented in many countries to protect bank depositors， in full or in part， from losses caused by a banks inability to pay its debts when due. As early as 1993， Chinese policymakers were already discussing the establishment of a deposit insurance fund to protect the interests of the public. Since the 2008 worldwide financial crisis， calls for a deposit insurance system have become louder and louder in China as concern about financial security continues growing. In recent years， the goal of establishing a deposit insurance system has been repeatedly written into each years govern- ment work report. This year， conditions are finally ripe for the launch of the deposit insurance system in China.

“The purpose of establishing a deposit insurance system is to create a more stable and healthier financial environment which will better protect the interests of depositors and motivate financial institutions to operate in a safer manner，” remarks Yang Kaisheng， former governor of the Industrial and Commercial Bank of China.

In the opinion of Zhang Jianguo， president of China Construction Bank， the launch of a deposit insurance system can facilitate the countrys market-oriented interest rate reform and even quicken the pace of comprehensive financial reform.“In the process of promoting financial reform， credit risks rise，” he explains.“China needs to establish a deposit insurance system as soon as possible to prevent systematic risk.”

Industry insiders believe that through launching the deposit insurance system and improving the financial institution withdrawal mechanism， Chinas financial market will attract more private capital to establish small and medium-sized banks， thus relieving financing difficulties that plague the real economy. “Previously， the government offered credit guarantees for banks，” explains Guo Tianyong， a professor at the School of Finance of the Central University of Finance and Economics（CUFE）， who participated in drafting the deposit insurance system of China. “With the commercialization of Chinese banks， the responsibility should no longer lie with the government.” After the establishment of the deposit insurance system， he adds， banks in financial trouble can leave the market through bankruptcy and liquidation procedures.

Market-oriented Interest Rates

“The cap on deposit interest rates may be removed if the right opportunity presents itself this year，” asserted Zhou Xiaochuan， governor of Chinas central bank， at a press conference during this years NPC annual session. “The last step everybody is expecting can finally be reached this way. Its very likely to happen.” This marked the first time for Chinese authorities to unveil a timetable for completing market-oriented interest rate reform.

Freeing up deposit interest rates is an important indicator of reform completion. Back in 1993， China had already proposed a plan to carry out market-oriented interest rate reform. After two decades of painstaking efforts， the reform is facing its “l(fā)ast shot” to become final. In July 2013， Chinas central bank called off caps on lending interest rates， prompting expectations for a cancellation of caps on deposit interest rates. “We are very close to letting the market fully determine interest rates by removing all caps on deposit interest rates，”declared Zhou.

At the turn of the 21st Century， China reformed the management structure of its major state-owned commercial banks. After stripping bad assets， banks were listed on the stock market one after another. Due to Chinas restrictions on deposit and loan interest rates， however， banks could earn fat profits simply by maintain- ing high deposit-loan interest margins. In this context， almost all state-owned banks， local commercial banks， and even some foreign-funded banks lacked motivation to innovate their credit products and services. Even worse， most banking institutions blindly expanded their sizes to earn greater revenue by further widening interest margins. The cash crunch in Chinas banking sector last year was primarily a result of restrictions on interest rates.

After market-oriented interest rate reform is complete， especially the removal of caps on deposit interest rates， banks net interest margins will shrink， thus changing the competition landscape of the banking industry. “Banks can no longer merely count on revenue from interest margins especially after market-oriented interest rate reform，” opines Yan Bingzhu， chairman of the Bank of Beijing. “They can only satisfy the requirements of such a change through accelerating integrated operation and providing better products and services to customers and society.”

Regulating Online Finance

No one can deny that online finance has become one of Chinas most promising industries in recent years. Especially after the launch of Yuebao， a monetary fund released by e-commerce giant Alibaba Group， a hurricane of internet finance swept across the country. Statistics show that the total assets of Yuebao reached 578.9 billion yuan in 2014， making it one of the worlds largest monetary funds. Following Yuebao， other Chinese internet giants have consecutively launched many similar monetary funds. Moreover， another form of online finance， peer-to-peer （P2P） lending， is flourishing in China. To date， China has become the worlds biggest P2P lending market.

Despite rapid growth， the countrys online financial industry is suffering some growing pains. Particularly， the P2P lending market is in disarray and most P2P lending websites share the same business mode. Some even encounter trouble or commit frauds that cause tremendous losses for investors. Statistics released by Wangdaizhijia.com， a P2P lending market research site， show that 275 P2P lending platforms met trouble or went bankrupt in 2014.

Although the internet represents the future of the financial industry， it requires the Chinese government to formulate and enact tailored policies and measures to regulate the development of online finance in the country. According to He Qiang， also a professor from CUFE School of Finance， at present the country primarily regulates its financial industry through administrative measures， and the market only plays a supplementary role. With the fast growth of online finance in recent years， old methods are becoming obsolete. The country needs to let the market play the primary role in the regulation of the financial industry， thus tapping the potential of market forces.

At the press conference， Zhou Xiaochuan revealed that China is formulating new polices to encourage the development of online finance while taking proper measures to regulate the industry. With the introduction of such policies， the countrys online financial industry is expected to end its current disorderly development and bloom.