China to end monopoly of state-owned banks

Challenging for the first time the monopoly of the state-owned banks, China has announced plans to broaden the financial sector reforms by allowing private capital financing.

Consensus has emerged among leadership of the ruling Communist Party to let private capital play greater role to reduce, if not break, the state sector's banking monopoly, Premier Wen Jiabao said.

This is the first time China has acknowledged the monopoly of state-owned banks following last month's announcement of a pilot project to reform the financial sector in Wenzhou, an eastern coastal city with a tradition of entrepreneurship.

Wen, who along with President Hu Jintao and other top leaders is set to retire this year, made the remarks while visiting some companies in Fujian province and the Guangxi Zhuang autonomous region, state-run China Daily reported on Thursday.

Analysts say the move to open up financial capital was aimed at increasing investment and competition in financial and banking sectors of the world’s second-largest economy, giving more scope for its currency Yuan to play bigger role.

Economists have long complained about a lack of progress in reform of the state-dominated banking and financial industry and of inadequate service for the country's large number of small- and medium-sized enterprises.

"Regarding raising funds for your businesses, I think it has been too easy, quite frankly, for our banks to make profits," Wen told businessmen during his visit to the factories.

"The reason is that a small number of large banks are in a monopolistic position. It is only from them, and nowhere else, that companies get the loans they need,” he added.

"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.

"I think some successful practices from Wenzhou's pilot reform can be introduced nationally. Some of the practices may even be immediately implemented."

Under the current system, China's state-owned banks live off an effectively guaranteed spread between deposit and lending rates that are set by the central bank.

The spread now stands at around 3 percentage points. The so-called Big Four banks—Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China—raked in a combined profit of about 630 billion yuan ($ 100 billion) last year against the backdrop of slowing economic growth.

The Wenzhou reform was announced by the government on March 28.

It allows private financial services, including setting up village banks and rural financial cooperatives. Wang Jianhui, chief economist with Southwest Securities, said that a more competitive banking sector would significantly boost the vitality of private businesses.
"The monopoly in the sector makes getting loans expensive. Private businesses, especially smaller ones, have to get cheaper loans to flourish," he told the daily.

Qiu Zhiming, president of the privately-owned Beifa Group, a maker of stationery in Ningbo, Zhejiang province, said big state-owned lenders are charging his company twice as much as the benchmark interest rate by imposing various charges.

He said banks always think up new ways to charge his company more and if he doesn't accept it then he does not get the loan.
"At the end of the day you find that a significant part of the profit goes to the banks. Something has to be done, urgently," he said.

The financial sector reforms comes at a time when the economy is set to hit a slow-growth cycle.

Gross domestic product growth may hit a three-year low of 8.4% in the first quarter, Zhang Xiaoqiang, deputy minister of the National Development and Reform Commission, said.

That figure implies an annualized quarter-on-quarter growth of just 6.5%, below the 7.5% target this year.