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By Stuart Burns

Continued from Part One

The Chinese authorities promptly moved to calm the markets’ overreaction and a degree of normality has since resumed, but the message appears to be that the authorities are intending to shake up China’s banking system.

Particularly, they want to curb what they see as excess and loose lending, and restrict the shadow banking sector, which shows the greatest similarities to America’s (and the UK’s) model of borrow short and lend long prior to the financial collapse.

In many ways, though China’s banking sector is very different from the West.

For one thing, China’s banks have an extraordinarily high savings rate. Unlike the United States in 2008, the country as a whole is living well within its means, the Economist says. Its banks are subject to pretty stringent rules: their loans cannot exceed 75% of their deposits, and, unlike many countries, China is already implementing the global prescriptions on bank capital known as Basel 3.

In addition, the state already owns the majority of the major banks, allowing it to manage failures more effectively. The drawback and the challenge will be to break the cozy relationship between state-owned banks and state-owned major enterprises, a relationship that for far too long has channeled cheap loans from the former to the latter and fueled inefficient investment – hence, in part leading to the rise in lending-to-GDP growth ratio.

The Economist article suggests a rollout of the pilot property tax currently running in Chongqing and Shanghai to other cities as a means of curbing property price inflation may be on the cards, and expects the government to do more to encourage private investment in industries.

The Economist observes that curbs of one form or another may well slow growth in the short term and quotes Dragonomics in Beijing as predicting growth may run at only 6% next year, well below Beijing’s target of 7.5%.

China’s banks may not be in danger of collapse, but they are facing significant change – that much seems clear.

Source: Are China's Banks Going The Same Way As Wall Street's 5 Years Ago?