Chinese leader warns state bank ‘monopolies’ will hinder growth

Premier Wen Jiabao, the top economic official in China, has said the country’s state-owned banks are monopolies that must be broken up.

Mr Wen’s comments, delivered in private on Tuesday but reported in Chinese media yesterday, suggest Beijing sees a growing political danger from its failure to carry out long-promised reforms of state banks, which pay minimal interest on deposits and made tens of billions of dollars in profit last year. Public resentment has risen as China’s rapid economic growth slows and amid fears of a spike in job losses.

Speaking to business people, Mr Wen said Beijing has launched reforms aimed at serving entrepreneurs better by opening up banking to private investors,.

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“Our banks make money too easily. Why? Because a small number of big banks have monopoly status,” Mr Wen said, according to a transcript on the China National Radio website. “To allow private capital to flow into finance, basically, we need to break the monopoly.”

Mr Wen spoke during a visit to Fujian province, a centre for export-driven private enterprise. The government announced last week it will launch a pilot project to expand private lending in Wenzhou in neighbouring Zhejiang province after a wave of defaults on underground lending that supported businesses there.

“I think those elements in Wenzhou that succeed need to be expanded nationwide and can immediately be introduced nationwide,” Mr Wen reportedly said.

China’s leaders have long used the country’s banks to subsidize state industry, shifting wealth from savers to politically favoured companies. Entrepreneurs produce most of China’s new jobs and wealth but get only a small percentage of bank loans.

That has fueled resentment, especially as the “big four” major state-owned commercial banks, which account for about half of deposits, report record profits.

China’s biggest lender, Industrial & Commercial Bank of China Ltd, earned £21 billion in 2011, ranking it among the world’s most profitable companies. Other major banks – Bank of China, Construction Bank of China and Agriculture Bank of China – reported similar windfalls.

The government sets deposit and minimum lending rates, giving banks a guaranteed margin of about 3.5 per cent. It has begun allowing lenders to charge more for some commercial loans, which has increased profit margins still further.

The World Bank and the Chinese government’s own academics have added to calls for reform, warning economic growth could slow sharply unless banks become more efficient and lend more to support the dynamic private sector.

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The government has repeatedly promised over the past decade to make banks more market-oriented and to pay higher deposit rates but has yet to make major changes. Analysts expect little progress for at least another year.

Mr Wen was seen as a reformer when he became premier in 2003. But change has been slow and entrepreneurs and foreign businesses complain Beijing has backtracked in some areas as it tries to build up dominant state-owned companies.

He apologised last month in a nationally televised news conference held at the end of China’s annual legislative session for failing to move faster on reform.

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