Urgent Chinese financial sector reforms needed

Dangerously high levels of corporate debt and a continuing economic deceleration make it imperative that China implement urgent financial sector reforms.

Among the most pressing reforms are liberalizing interest rates and boosting bond selling in order to shore up the battered financial sector. Dai Xianglong, chairman of the National Council for Social Security Fund, said during the ongoing 2012 Summer Davos Forum in Tianjin that China's company debt remains high and is even increasing, creating more risks for Chinese banks that are the major source of company financing.

Dai suggested the People's Bank of China, the central bank, give small and medium-sized lenders even bigger room for interest rate movement. Allowing banks to decide interest rates freely will force Chinese banks to speed up transformation of their businesses and explore international markets.

PBOC has gradually relazed its grip on interest rates since this June, allowing banks to offer a deposit interest rate 10% above the benchmark and a lending rate 30% below it.

Chinese enterprises have an overall debt-asset ratio of 105.4%, far in excess of the 80% danger line, making them the riskiest in a 20-country ranking produced by the Chinese Academy of Social Sciences (CASS).

Li Daokui, director of the Center for China in the World Economy, also warned about the dire risks faced by Chinese banks, saying lenders remain the biggest risk for the country's financial sector. Chinese banks' total asset value was over twice the country's gross domestic output, said Li at a session during the forum.

Some are warning of a multitude of financial problems that might emerge should China's economic growth rate fall dramatically, which will be the greatest risk for the financial sector in the next five years.