january-08The Chinese government looks to be reducing its control of the financial sector and considering the introduction of private competition. The China Banking Regulatory Commission (CBRC) plans to create up to five private banks in order to increase the amount of competition in the growing country’s financial industry.

At first, the banks will operate under the supervision of China’s banking authority, with the possibility of private operation a sight in the future. The banks will open China’s currently strictly supervised financial sector and allow it to foster a new wave of economic growth.

The introduction of private banking comes at an interesting time for China. The country’s large shadow banking industry – lending from non-banking companies and private firms – has caused many economists to express concern about China’s long-term economic prospects.

Shadow banking makes credit significantly less transparent and, according to many top economists, could present a major risk to China’s long-term growth. The private banks aim to prevent this shadow banking activity from growing while encouraging Chinese citizens to borrow only from reputable sources.

Despite the concerns over shadow banking in China, some economists believe that it could have helped the economy grow over the past decade. A document drafted by a team of Chinese policymakers admits that the risk of shadow banking have largely been controlled by the government and its regulatory agencies.

China has suffered from a slowdown in economic growth over the past two years. As private growth has begun to slow down, Beijing has experimented with a number of different strategies to encourage private investment and push the Chinese economy back into a state of rapid, sustainable growth.

In September, the Chinese government opened a free-trade zone in Shanghai – one of the country’s most important markets – where market-driven interest rates and other economic experiments will be conducted on a trial basis.

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