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Published on : Jul 28, 2015

The past few weeks that witnessed the tumbling of China’s share market, have raised some questions about the state of the economy in China. It is true that the investors are scared, stock market slumped, and the country is experiencing the slowest growth rate since last two decades but China’s financial system is expected to be not affected massively. It is because the financial system in the country is bank-based and stocks constitute merely above 10% of household wealth. Banking sector is the most important sector in the country and is expected to play a pivotal role in the revival of the economy.

Earlier, interest rates of the banks were fixed at below market levels. However, last year, the banks were given the liberty to fix their interest rates up to 1.2 times the official deposit rate. That rose to 1.3 times in February and further to 1.5 times in May this year. It is expected that all interest rates will be determined by the market by the end of the year. Introduction of wealth management products has also helped as these offer a fixed return similar to bank deposits but at a higher rate. The State Council has repealed outdated administrative rules that prevented banks from responding to market conditions.

Though industry analysts have pointed that the largest banks in China are state-owned, the government’s approach to improve efficiency has led to increased competition in the banking sector. Five privately funded banks have received approval from the regulator to participate in the banking operations of the country. The country’s central bank has started a deposit insurance scheme to mitigate the risks that emerge from a deregulated banking environment. The Chinese banks are now more connected to the international financial system.