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. Last Updated: 07/27/2016

Beijing Fixes Sights on Banks

SHANGHAI, China -- China is quietly modernizing an array of financial safeguards as policymakers grow increasingly nervous about the side-effects of opening up the economy at breakneck speed.

Economists say warding off economic and financial risks has rapidly scaled Beijing's priority list as officials prepare to throw open the banking industry in a year's time and gradually let the yuan trade more freely.

"China's financial system bears all the legacies of a planned economy," said First Securities economist Wang Haoyu in Shenzhen.

"That means that its competitiveness is weak, so China faces a real threat of losing control of the financial sector to foreign competition when it liberalizes its interest rate and currency regimes," Wang added.

One step to ensure as little as possible goes awry in the years ahead is a plan to let banks facing an intraday cash crunch borrow automatically from the Central Bank at preferential rates using bonds as collateral.

The new facility, due to go into effect on Dec. 8, differs from the Central B ank's discount window, which is subject to limits on how much and how often a bank may borrow.

Beijing is expected also to usher in a deposit insurance scheme around the end of this year, complementing investor protection arrangements introduced earlier this year for the insurance industry and the stock market.

"Mapping out a strategy for financial security in the longer run has now become a core issue not only in the financial system, but also for China's economy," said Cheng Manjiang, an economist with Bank of China International.

The measures fit snugly with the guiding principle of the ruling Communist Party's five-year plan up to 2010, which spurns growth for growth's sake and aims to put the the world's seventh-largest economy on a more stable, sustainable path.

"It's now the right time for China to look into the future to build up mechanisms for long-term financial security," said Ma Jun, an economist with Deutsche Bank in Hong Kong.

"Because banking sector reforms have helped to reduce historical bad loans to a great extent, the time is now ripe to build up a system that prevents a resurgence of such debts," he said.

A new burst of bad loans and the economy's over-reliance on bank lending were among the risks highlighted by the Central Bank in its first full-length financial stability report produced earlier this month.

In advance of December 2006, when China will throw open most banking business to foreign competition in line with pledges made when it joined the World Trade Organization, Beijing has urged banks to clean up, go public, and attract capital and expertise.

Heeding the call, Bank of Communications and China Construction Bank have already gone public in Hong Kong, while 19 overseas firms had invested $16.5 billion in 16 local lenders by the end of October.

Economists say it is the basic banking skills they are bringing in, as much as the new safeguards, that will determine whether policy makers attain their goal of financial stability.

For instance, Wang with First Securities said the legacy of central planning meant many loans that should be decided on commercial grounds were still made because of administrative edicts.

"Chinese banks need to acquire foreign expertise, including the techniques of how to price their products," he said.