2012-04-05

Why is Wen Jiabao criticizing the banks?

In the SCMP's Bankers reject Wen's criticism, George Chen writes:
Premier Wen Jiabao's tough talk about breaking the monopoly enjoyed by the nation's state-owned banks has rattled executives at those lenders.

But sceptics wonder whether Wen has the power to push through change. He has the reputation of advocating reforms that do not always happen. Moreover, Wen is due to retire in less than a year.

...Wu Jinglian , an influential economist, said recently that he believed it would be very hard for Beijing to break the industry monopoly among SOEs, which may challenge certain special interest groups.
Wen Jiabao is targeting the banks because they are the linchpin of the centrally planned economy. The state-owned banks lend to state-owned companies controlled by high ranking party members. Political reform in China has failed because financial reform in China has stalled. Fresh off a political victory, Wen Jiabao is pressing for financial reform and he does not expect to see any changes. What he is doing is paving the way for Li Keqiang to follow through on his rhetoric.

The Wenzhou pilot program cannot be overlooked because it is a very bold proposal. It is a common-law style advancement: allow the underground banking sector to become legal. Instead of prosecuting the booming gray market business, China has legalized it and after it succeeds, will spread it across the country. A private financial system will compete with state-owned banks for deposits. It will pay higher interest rates and charge higher rates for loans, to better credit risks, while the state-owned banks continue make bad loans to politically connected firms. Eventually, this will start impacting the state banks and instead of being regulated by politics, they will be regulated by markets. The old way to reform the banking sector was top down reform of the state-owned banks. This failed, the PBOC was blocked by the Ministry of Finance, and everything went back to business as usual after 2008. Now, a new reform effort is taking place, a bottom up approach that is more likely to succeed and far greater impact on the Chinese economy.

Another article in the SCMP from today notes the reform effort picking up. In Days numbered for monopoly of state firms, Eric Ng writes:
In 2005, the State Council issued a policy circular on supporting the development of private enterprises. It said private firms should be allowed to invest in sectors monopolised by state-owned firms. It called for faster reform and greater competition in sectors such as electricity, telecommunications, railways, aviation and petroleum.

Private firms should have equal access to the capital markets, and banks should be encouraged to increase their lending to small and medium-sized firms, it said.

It also said private capital should be permitted in financial services like banking and insurance, as well as utilities that had been traditionally operated by the government, such as water, gas, domestic heating and waste treatment and disposal.

While the policy sounded good on paper, putting it into practice has proved complicated.

...The State Council signalled Beijing's resolve to make reforms when it set a deadline of June 30 for civil servants to come up with detailed plans to implement the circular. And late last month, the National Development and Reform Commission called a meeting of 45 government departments to drive the initiative.
Reform is slowly restarting in China, but the property sector and broader economic weakness will assist in jump-starting the process.

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