Liberalization to stoke volatility in China's banking sector

The stable policy environment that is the foundation of stability in China's baking sector is under threat.

Charlene Chu, head of China financial institutions at Fitch Ratings Ltd., said China’s interest rate liberalization will have a worrisome effect on this stability.

She noted that over the last decade, the main source of stability in the Chinese banking sector was the very stable policy environment that was very strict in terms of government- set interest rates and a closed capital account. She said this led to very stable capital funding.

China's recent capital account opening and interest rate liberalization ". . . is a lot of change in a short amount of time," she noted.

‘‘We are quite worried that this could add to volatility in the banking sector. The problem is that they do have funding challenges and they need more money to be coming in from offshore," she said.

If China were to significantly slow down the pace of liberalization, then China will become more reliant on domestic funding and that could also be difficult for China.

She does, however, believe that the liberalization and capital opening thas been fairly modest in terms of the pace.