China’s Banks: Too Big To Lend

Business Center of ICBC in Beijing

Business Center of ICBC in Beijing (Photo credit: Wikipedia)

In the United States, large banks have been criticized because they are “too big to fail.” In China, the country’s largest banks have recently come under criticism because they are “too big to lend.” In both countries, there is a growing body of thought that large banks need to be downsized and broken up.

According to Richard W. Fisher, President and Chief Executive Officer of the Federal Reserve Bank of Dallas, and Harvey Rosenblum, Executive Vice President and Director of Research at the Dallas Fed, the share of assets controlled by the five largest banking institutions in the U.S. has tripled to 52 percent from 17 percent in the early 1970s. Because complexity has come with greater size, magnifying the opportunities for opacity, obfuscation and mismanaged risk, Fisher and Rosenblum believe that restructuring is a far less drastic solution than the quasi-nationalization that occurred in 2008 and 2009 as a result of bank bailouts. They believe that downsizing can improve competition and market discipline.

In comments made in a China National Radio website interview last week, Premier Wen Jiabao came to the same conclusion regarding China’s large banks, but for a different reason. Premier Wen believes that China’s largest banks are too big to lend.
Premier Wen said that China’s four main banks are a monopoly that must be broken up so that smaller private firms can get access to loans as the global economy slows. He went on to say that the current banking environment in China has squeezed private businesses and that the large banks’ stranglehold on lending needs to be broken to ease the flow of private capital.

“In regards to financing costs,” Premier Wen said, “let me honestly say that our banks are making a profit too easily. Why is this so? It’s because a few big banks are in a monopoly position. What we can now do to ease private capital flow into the financial system, fundamentally speaking, is to break this monopoly.”

Although many new banks have been established in China over the past 30 years — there are now 3,800 banks in China compared to 7,357 in the United States—the country’s banking system remains heavily concentrated. China’s top four banks currently account for approximately 40 percent of total loans. In the fourth quarter of 2011, the five largest Chinese banks accounted for 62 percent of total bank profits.

Even though Premier Wen’s comments are very unusual for a senior Chinese leader, they come on the heels of a bold new experiment that is being carried out in the city of Wenzhou where there has been an explosion in underground lending. Due to credit restrictions that China has implemented over the past two years, independent business owners have had to borrow money at high interest rates from informal lenders after being rejected by major banks, who favor other state-controlled enterprises because their debts are implicitly guaranteed by the government. The Wenzhou experiment, which was announced two weeks ago, will legitimize private lending in that city.

Premier Wen’s comments and the Wenzhou experiment reflect the step by step development of China’s capital markets that we have been following over the past year, as well as recognition by China’s leadership that small and medium enterprises (SMEs) are the backbone of any economy and must be encouraged.

In a presentation at the Cheung Kong Graduate School of Business in Beijing in late 2008, Yijiang Wang, professor of economics and human resource management, said that he did not believe that China was doing enough for its SMEs, given that history shows that SMEs determine the economic vitality and strength of a nation. In his comments, Premier Wen said that the experimental reforms being introduced in Wenzhou to help struggling private firms could be expanded nationwide. Professor Wang’s message seems to have been heard.

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One Response to “China’s Banks: Too Big To Lend”

  1. The big four banks also represent a powerbase for the establishment and communist party, given that they are state controlled entities.

    Breaking them up is one option, another is to fully break the links between them and the state.
    – force more market disciplines on them, such as paying the full cost of funding their capital
    – prevent them lending to other state owned entities and local governments at non-commercial rates

    This may shift their focus on to independent businesses, both small and mid-sized.

    The recent World Bank backed report on the Chinese economy urged such reform ( )