China Research

The recently made comment by the Chinese Prime Minister We Jiabao on an opening of the banking sector is not easy to judge. He gave his opinion on this issue briefly after this year’s National People’s Congress in a radio interview. The comments were made by a Prime Minister on leave whose probable successor LiKeqiang is about to become increasingly visible. Thus, we don’t know whether Wen has a majority for his ideas. Cautiousness in its interpretation seems to be motivated.

It may be possible that the Prime Minister wanted to collect sympathy points from the population by his critical words. It is, however, worthwhile mentioning that he did not plead for a reform of the banking system because of its inefficiency, its lagging international competitiveness or the major problem of shortages of new credits till small and medium-sized enterprises. Instead, Wen pointed that the Chinese banks make their huge profits too easily – a comment that certainly receives a lot of appreciation in the population. And Wen singled out the openness of his comments, which implicitly means that others are less frank.

The timing for Wen’s comments was obviously well chosen, i.e. shortly after the annual reports of three major Chinese banks, which actually announced that they had increased their profits in 2011 by 25 to 28 percent. This means for the largest of these three banks – Industrial & Commercial Bank of China – profits around $33 billion, which is really considerable also in a global perspective.

It should be noted that the banking issue is a hot topic in the Chinese political leadership. Wen’s position is the on the progressive side. But the voices of the conservative decision-makers are still in place. They argue that the Chinese banking system, with its four leading large banks, has been functioning well in the past, particularly during the years of the global financial crisis – and also compared too most foreign banks. The monopolistic banking system is regarded as a financial stabilizer and, consequently, working well; current restrictions and prohibitions on leveraged financial products are, consequently, well motivated, according to the conservative opinion on this issue.

The reform-friendly wing of the Communist Party, on the other hand, focuses strongly on the restricted access of SMEs to the credit market – a problem that is to have negative impact even on economic growth. And they add the argument – if the first-mentioned point was rejected – that China is too large and complex for being “ruled” by just a couple of large banks. According to the more market-oriented supporters of changes in the banking landscape, it makes sense to give private banks more commercial opportunities – but still in a cautious way. Thus, this kind of gradual reform approach would also ease the way to further, unavoidable privatization and deregulation steps in the future.

Furthermore, Prime Minister Wen Jiabao pointed at the feeler for private bank lending in the city of Wenzhou in South-western China that was announced by the government some days before the interview – a project that could be introduced at other places in China as well, according to Wen. This kind of formulation does not sound like a plan that is more or less ready for implementation.

The following conclusion looks safer: The possible reforms Wen has been talking about will happen without influential Western participation. Western banks will also continuously have to follow what the Chinese dictates for lending volumes and lending rates.

(Chinaresearch.se was kindly allowed to re-publish the author’s article in Handelsblatt from April 5, translated from German into English by LNU).

 

 

 

 

 

 

Frank Sieren
Journalist, author of various books (bestsellers) on China

 

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