Chinese Premier Wen Jiabao made some rather interesting comments about China ’s state-owned banks last week. The Telegraph translates: “Frankly, our banks make profits far too easily. Why? Because a small number of major banks occupy a monopoly position, meaning one can only go to them for loans and capital. That’s why right now, as we’re dealing with the issue of getting private capital into the finance sector, essentially, that means we have to break up their monopoly.”
Why, you might ask, does the number-two leader of a communist nation want to break up its nationalized financial system? Shouldn’t the government like owning hugely profitable banks?
Well, Wen’s concern isn’t really the state-owned banks’ outsized profits—perhaps he mentioned it to curry some populist favor, but it’s not the problem he’s seeking to rectify. Instead, the issue is small businesses’ difficulty accessing credit. State-owned banks tend to give other state-owned companies preferred credit access, due to the implicit guarantee in the government’s backing—there’s less risk of default than in lending to smaller private firms. When China ’s government tightened annual loan quotas last year, small businesses experienced a liquidity crunch, causing widespread bankruptcies in some southern manufacturing cities. Many were forced to secure financing in China ’s unregulated shadow banking system, where they often faced higher borrowing costs and unscrupulous lenders. This can make it difficult for small business owners to run successful, growing enterprises—and when you limit small businesses’ growth potential, you limit the broader economy’s potential.
Last October, Wen tried to combat this problem by directing state-owned banks to relax their small-business lending policies, scrap unreasonable charges and waive stamp duty on small-business loans. Last week Chinese officials went further, approving a pilot project to “regulate private funding” in the coastal city of Wenzhou . These reforms will allow citizens to set up banks, invest outside of the country, trade unlisted equities and develop different types of bonds—essentially liberalizing the financial industry and, potentially, legitimizing the shadow financial system.
The government said its goal is to adopt the Wenzhou reforms nationwide if the initial test is successful (though, what they’d consider “successful” is anyone’s guess). This is likely what Wen meant by “dealing with the issue of getting private capital into the finance sector.” If these reforms work as officials seem to hope, the influx of private capital into could improve entrepreneur and small business access to credit.
While we wait to see whether this works, there’s a near-term takeaway—party leaders still seem to be eyeing economic liberalization. There’s been some doubt about this recently within China , as some of the more traditionally communist elements of the ruling party have been jockeying for power, but recent policy moves have remained market-oriented. Officials have also relaxed rules on foreign investments within China (including purchases of China ’s historically closed-off “A-Shares” equity market), allowed up to 40% Guangdong pension funds to be invested in capital markets and given Chinese automobile insurers the authority to set their own prices and terms. It’s been and will be a very long process, but these are all positive and important steps forward.