China's banking sector tipped to be bigger than US finance industry by 2030

Updated March 24, 2014 13:43:00

China's government is planning further deregulation of its banking sector this year. China's economic growth already far outpaces the rest of the world and Australian analysts from ANZ predict its finance sector will now grow to twice the size of the US banking industry by 2030. But there are warnings of danger in such an expansion.

Source: The World Today | Duration: 4min 47sec

Topics: banking, china


ELEANOR HALL: To China, where the government is planning further deregulation of its banking sector.


But there are dangers in such an expansion.

Business reporter Pat McGrath has more.

PAT MCGRATH: It's been a big year so far for deregulation in China's finance sector.

The government's already announced plans to allow the first privately-owned banks since the Communist revolution.


And ANZ chief economist Warren Hogan expects the deregulation program to accelerate.

WARREN HOGAN: It's very similar to what Australia did in the 1980s: that is, deregulate the financial system, develop domestic capital markets and then, ultimately, float the exchange rate.

PAT MCGRATH: Today's report from ANZ says the creation of privately owned banks is just one part of a greater shift in how the sector will operate in the future.

WARREN HOGAN: The long-term financing role for that economy will be shed from the banks and be taken up by growing equity markets and debt markets. Banks will focus more on consumer finance, funding small-medium enterprises, this sort of thing.

And of course the industry at the moment has got a huge array of banks. There is the five big banks in China but there's hundreds of smaller banks and, as we saw in Australia in the '80s, and there were many examples of it, there will have to be significant consolidation of that sector over the decade ahead.

PAT MCGRATH: China's government has made it clear that it's hoping to tackle fluctuations in the supply of credit being created by unregulated lenders, known as "shadow banks".


WARREN HOGAN: The options for Chinese savers - and of course the Chinese at the moment are the great savers of the world; they're saving almost half their GDP every year - they can't send their money overseas, or not in any great quantity. Their equity market doesn't function very well. Those deposit rates are fixed at a low level.


In terms of borrowers, if the banks are regulated and can only lend so much, they go to these shadow banks or other institutions to borrow money and increasingly more and more financing activity is happening outside of the purview of the regulators, that is, happening outside of the banking system.

So there are these risks that are emerging in the financial system which I think are the greatest risk to China's economy at the moment, simply because their financial system is to some extent antiquated.

PAT MCGRATH: The fast pace of change does, course, come with risks.

WARREN HOGAN: You're going to have a lot of change in their financial sector over the next few years and that will create actual financial market volatility and probably just importantly it'll have people worried about the risks of a recession and this sort of thing in China.


But it's very difficult. Their system of government is quite centralised and this is effectively freeing up for markets to play a bigger role and for the private sector to play a bigger role. So they're going to want to stage this over a number of years.

PAT MCGRATH: ANZ operates throughout Asia so, like many other Australian banks, stands in a good position to capitalise on an unprecedented level of growth in China's finance sector.

WARREN HOGAN: China's financial system should match the size of the US within, you know, within five or six years. And our projection is that if they reform and continue to grow their economy, China's financial system including its debt equity and bank markets will be twice the size of the US by 2030.

PAT MCGRATH: The question for Australia is: whether its banks can compete with less regulated sectors in China and elsewhere in Asia.

Deloitte Access Economics seems to think Australian banks can. It has identified wealth management as one of the five industries that Australia should look to as the mining boom subsides.

Chris Richardson is a partner at Deloitte Access Economics:

CHRIS RICHARDSON: Asia's boom isn't ending. It's evolving. And Australia will have new and different opportunities to sell into that.

For example, its cities are really polluted, it wants clean air - that means opportunities for Australian gas. And Asia gets richer it'll travel more, it'll send its kids more to the rest of the world for education, it will want better food and it'll even want more care with its retirement finances. That's something Australia can help with as well.

ELEANOR HALL: That's Chris Richardson from Deloitte Access Economics ending that report from our business reporter, Pat McGrath.