Every leading nation’s big banks wield political clout. China’s, being state-owned and run by big political players in their own right, sit more easily at the center of power than most. They see it as their rightful place. Both they and the government see their role as providing conduits of national policy. Administrative guidance to the banks sets the course for their customers in business and industry in the cause of economic growth, be that slowing inflation, deflating bubbles or stimulating growth. So when Prime Minister Wen Jiabao says the big banks’ monopoly needs to be broken as they make easy money for themselves while denying loans to cash-strapped small and medium-sized enterprises he needs to be assured that he is safe in rattling such powerful cages and that the need to do so is urgent.
In the words of the song, breaking up is hard to do. Yet Wen’s words at least get the idea on the table and add to the determined thrust by the economic reformers to use the leadership transition now underway to revitalize near moribund financial reform. Wen again pointed to the pilot scheme in Wenzhou to create alternative financing channels for small and medium-sized enterprises in the city that have hitherto been forced into the usurious shadow banking system. This is being seen by some as an experiment that if successful will be expanded more broadly as a necessary underpinning of the rebalancing of the economy towards domestic demand.
The prime minister’s words came as regulators further opened capital markets to foreign investors. That, though, is politically easier to do than taking on the big banks, large redoubts of vested interests that they are. The opportunity to do so may lie in the slowing economy turning more bank loans sour. Government has had to step in once before to clean up the state-owned banks’ balance sheets. The price for doing so again could be more conditional. And might it even include the big banks improving their rudimentary credit-risk analysis? A bit more competition wouldn’t go amiss in that regard, while plenty of entrepreneurs would be happy to have their creditworthiness judged on their business prospects rather than their political connections.