Consensus to reduce stranglehold of big banks, stimulate flow of private capital

China's top leaders have reached a consensus to reduce, if not break, the stranglehold of State-owned banks in financial sector lending and promised more steps to facilitate the flow of more private capital and stimulate economic growth.

Premier Wen Jiabao said a few large banks are "in a monopolistic position" and make profits in a "far too easy" way.

Wen's statement is an indication that Beijing is concerned about the excessive financial muscle the big State-run banks wield and that they need to be broken up as they make far too much money. "This is why we've now come to make way for private capital to enter the financial services sector, which ultimately requires breaking monopolies. There is already a consensus among the central leadership, which is reflected, as you can see, by the pilot reform in Wenzhou," Wen said.

The role of State-owned banks in disbursing credit came under the lens after a severe credit crunch forced many private businesses to shut shop or even turn to high interest underground loans, economists said.

Many small- and medium-sized enterprises (SMEs) had earlier expressed concerns over their inability to obtain funds from the big banks, as they were keener on lending to the asset-rich State-owned firms.

Last year many small companies went bankrupt, as they could not secure funding after the government urged banks to curtail lending as part of efforts to curb inflation. That situation had a disastrous effect in Wenzhou, the cradle of private enterprises, when nearly 90 small-business owners either fled or went under, after being unable to repay underground money-lenders.

During the same period, the Big Four banks including Industrial and Commercial Bank of China (ICBC), Bank of China, Agricultural Bank of China and China Construction Bank, reported huge profits from infrastructure and real estate investments. The Big Four banks also collectively accounted for more than 50 percent of all the banking deposits in China.

"Compared with many developed nations like the US, China is not that free a market for commercial banks. In China, the Big Four lenders have always enjoyed huge advantages," says Peter Pak, executive director of BOCI Research Ltd, an investment research firm. "This kind of situation causes many problems, including poor liquidity for non State-owned enterprises."

Last year, major State-owned banks reported windfall profits, representing some of the most profitable financial institutions in the world.

A report by the World Bank, the Ministry of Finance, and the State Council Development and Research Center also urged bigger support for private sector entry in monopolized industries, including lowering entry barriers.

Analysts say that now more than ever the banking sector needs to be revamped as the SMEs are expected to play a crucial role in China's growth and employment prospects in the coming years.

Last month, the State Council signaled its intention for financial sector reforms when it picked Wenzhou to pilot a project aimed at attracting more private capital. Besides encouraging private capital in the form of local financial institutions, the government has allowed local residents to invest overseas, set up loan companies and acquire shares in village banks.

"The decision is significant as it will unleash the power of Wenzhou's private capital," says Wang Jianhui, chief economist with Southwest Securities.

Oliver Barron, head of NSBO China, a Chinese government policy research house, says the financial reforms that have come out of Wenzhou in response to the city's mini-financial crisis last year can be used as a model for similar changes elsewhere.

Many private entrepreneurs applauded the government move.

"Many new investment opportunities are coming up, and this will help reduce financing costs," says Zhu Jianfeng, general manager of Gold Emperor Group, a Wenzhou-based shoemaker.

However, Zhou Dewen, chairman of the Wenzhou Small- and Medium-sized Enterprise Development Association, says that some gray areas such as who would be responsible for the vetting and approval of local financial institutions need to be ironed out.

"If setting up village banks or lending companies still needs approval from the central bank, then there is actually no breakthrough," Zhou says, adding that the authorities also need to specify the qualifications for private loan companies to be restructured into legal financial institutions.

According to central bank estimates, underground lending in Wenzhou was expected to be about 110 billion yuan last year. It was reported that more than a third of the money went toward real economic activities while the balance was used for speculative activities.

According to Zhou, during the process of legitimatizing informal lenders, the government may also have to grant licenses to existing underground lenders to operate as small-credit companies. There have also been no indications from the government on whether it will liberalize interest rates, a move expected to open up the financial sector. "It is a pity that it was not passed this time," he says.

Xie Yu contributed to this story.

lvchang@chinadaily.com.cn

(China Daily 04/06/2012 page3)