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China’s State Bank Monopoly and Premier Wen’s Recent Criticism

During a recent news conference on China National Radio, China’s Prime Minister Wen Jiabao announced his view that the monopoly of China’s biggest state-run banks needs to be broken up:

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.

Indeed the four biggest banks in China, the Industrial and Commercial Bank of China, the Bank of China, the China Construction Bank, and the Agriculture Bank of China, have reported impressive profits this past year, with recent revenue growth of up to nearly 30%! Even though Prime Minister Wen may have been known to be somewhat of a critic of the system, it was nonetheless a surprise for many to hear him so publicly condemn the state-run banks as being too powerful.

Premier When proposed a strengthening of the private bank sector in order to break up the bank monopoly in China, as he criticized that these four banks are making profits on loans that are too difficult to take out elsewhere:

That’s why right now, as we are dealing with the issue of getting private capital into the finance sector, essentially, that means we have to break up their monopoly.

These proposals would certainly be a first step to a less government-controlled market, however these goals are also very far-reaching and ambitious. It is important to note as well that, as Chinese manufacturing and the rest of the economy has grown, banking is hardly the only industry in which the state has a monopoly or major controlling stake, as one must simply look towards Chinese oil, energy, and telecoms industries as other examples.

When one puts this statement in the context of When stepping down from office this year, it is unclear if the Premier will even really have the opportunity, the time, or the internal support to actually reform the system. The statement however has had the positive effect of putting the issue and the need for reform in the spotlight. A clear example of this need has been the recent reporting of the rise of underground or black-market banking, particularly in coastal regions while and at the same time Xinhua News has been reporting on a huge number of suicides of late due to borrowers inability to repay loans.

Where Does The Reform Start?

According to the New York Times, Beijing is planning a project in the coastal city of Wenzhou where they will encourage the establishment of local village banks and private lending companies. This is only a first step though and it is yet to be seen how much progress this actually represents.

ICBC – China’s Top Bank

The Industrial and Commercial Bank of China (ICBC) is not just the largest bank in China, but its market value of US $211.259 billion also makes it now the highest valued bank in the world.

ICBC, originally founded 1984, has since grown at a phenomenal pace. As of the end of 2011 it had 16,227 branch offices in China with around 4.5 million clients. In addition, the bank has offices abroad in South Korea, Germany, Portugal, Russia, USA, Great Britain, Australia and Japan. As of October 28th, 2005 ICBC officially became a private bank and one year later had an initial public offering of US$21.9 billion, which, at the time, was the highest IPO ever (a record that would later be surpassed by AgBank in 2010).

China’s Banks Conquering Europe

The German newspaper Die Welt recently published an article titled The Jump of China’s Banks to Europe. This article explains how ICBC, together with the Agricultural Bank of China (ABC), is slowly taking over London: ICBC is now celebrating the 20th anniversary of its first office abroad. The ABC has also just opened its offices in London, a milestone of which its chairman Yan Haiting has said he is very proud.

Breaching Europe as a Landmark

Like many Chinese sectors these days the rapidity of growth has become characteristic in the banking industry. Up until 2007, there was not a single Chinese Bank that appeared in the list of top 20 banks in the world by market capitalization. It is now only 5 years later in 2012 and Chinese companies currently hold the top two spots.

What does this have to do with Premier Wen’s recent comments? ICBC would have to be the best example as currently 75% of the bank is owned by the central government. Given China’s recent growth and relative stability when compared to the financial institutions of the West since the crash in 2008, Chinese banks are seen as reliable places to have cash. Having the explicit support of a government with somewhere in the area of US $2 trillion in reserves is a very reassuring signal in this time of financial uncertainty. In general, Europeans will be able to benefit from the proactive presence of Chinese banks as loans from these institutions are easier to obtain.

Similarly, Chinese banks should be able to benefit from the growing population of Chinese living abroad. As Loretta Napoleoni, a London-based economist and author of the book “Maonomics – Warum chinesische Kommunisten die besseren Kapitalisten sind (Maonomics Why Chinese Communists are Better Capitalists), describes, Chinese Banks are capitalizing on the Chinese living in Europe a target group which has historically been neglected by the local European Banks. As Ms. Napoleoni notes: Even if they speak German and English, the Chinese prefer a Bank where they may speak Chinese.

From all this it is clear that Chinese banks are gaining in strength, growth that is not limited simply to within the country’s own boundaries. How much though does competition from abroad factor into Premier Wen Jaibao’s comments regarding a state monopoly in the Chinese banking industry? More importantly, do these comments signal any significant shift in policy for the government or are these to be seen as the fading last comments of a prominent political leader on his way out?

Author Bio:- Christina Grohmann works on the marketing team for China Performance Group (CPG), a supply chain advisory firm that has been an expert in the field of China sourcing since 1978.