Banking reforms imminent in China?

No action expected until autumn, however.

China promised broad changes to its state-run banking industry, including allowing the creation of private lenders to support its credit-starved entrepreneurs and rein in massive financial risks. The surprise announcement came amid signs China’s weak recovery from its deepest economic downturn since 2008 is weakening further.

The People’s Bank of China, the central bank, and the China Banking Regulatory Commission, the financial sector regulator, pledged to make interest rates and other aspects of banking more market-oriented. Western analysts said the move is necessary to channel more credit to productive activities. Both agencies also promised to increase lending to small and medium-size companies.

They will make attempts to allow private capital to initiate the setup of financial institutions including banks but gave no indication how that will take place.

China’s financial system is the Communist Party’s most powerful tool in controlling the entire Chinese economy and supporting state-run businesses. The communist leadership, however, is not expected to make major policy changes until after a party meeting in the autumn to decide on long-range strategy.

Some analysts believe the announced changes will lead to a significant near-term change in the banking sector, but view it as a step in the right direction.