Chinese Premier calls for break up of state-run banks

THE Chinese Premier, Wen Jiabao, said the nation's biggest state-run banks had too much power and ought to be broken up because they earned far too much money.

By InvestSMART · 5 Apr 2012

By InvestSMART ·
5 Apr 2012

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THE Chinese Premier, Wen Jiabao, said the nation's biggest state-run banks had too much power and ought to be broken up because they earned far too much money.

The remarks, delivered during a national radio address while the Prime Minister was travelling in southern China, were unusually bold and appear to be a direct challenge to others in the nation's Communist Party leadership to speed up reforms of the financial system.

According to China National Radio, Mr Wen said: "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 ... That's why right now, as we're dealing with the issue of getting private capital into the finance sector, essentially, that means we have to break up their monopoly."

Mr Wen, who is expected to step down later this year as part of a once-in-a-decade leadership change, has been striking an increasingly vocal tone in recent months about political and economic change, and suggesting that vested interests in the party leadership are stubbornly protecting their hold on power and derailing his reform efforts.

Whether he has the political influence to force changes in the banking system is unclear. But while he is the nation's top economic planner, many analysts say the Communist Party's consensus method of ruling limits his ability to push through his own policies.

That is perhaps why Mr Wen has become willing to signal his frustration with the Communist Party about some key areas of politics and economics.

The state's control over the economy has been a chief point of contention among policymakers, with some pressing for greater state control and others favouring more aid to private companies.

Analysts think various power bases in the party are now battling it out to see who will gain a majority of nine seats on the all-powerful Politburo Standing Committee later this year.

Because he is nearing retirement, the 69-year-old Mr Wen might be trying to make a final reform push in his final months in office, analysts say, but also moving to challenge his opponents on important issues.

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Frequently Asked Questions about this Article…

What did Chinese Premier Wen Jiabao say about state-run banks in China?

In a national radio address, Premier Wen Jiabao said China’s biggest state-run banks “make profits far too easily” and occupy a monopoly position. He called for breaking up that monopoly to speed up financial-sector reforms.

Why does Wen Jiabao want to break up state-run banks and how does that relate to private capital?

Wen said a small number of major banks dominate lending and capital, which blocks private capital from entering the finance sector. Breaking up the monopoly, he argued, is necessary to encourage private investment into finance and increase competition.

How clear is Wen Jiabao’s political power to push through banking reforms?

The article says it’s unclear. Although Wen is the nation’s top economic planner, analysts note China’s consensus-style Communist Party leadership can limit his ability to enforce changes, so his influence to force reforms is uncertain.

Could Wen’s comments signal a final push for reform before he steps down?

Yes. The article notes Wen is expected to step down later this year as part of a leadership change and analysts think he may be making a final reform push in his remaining months in office.

What role do Communist Party politics play in China’s banking reform debate?

The article highlights internal party politics as a major factor. Vested interests in the Party may protect their power and resist reforms, and analysts say competing power bases are fighting for control of key Politburo Standing Committee seats, which can affect reform outcomes.

What does breaking up the banks mean for bank profitability and competition?

According to Wen’s remarks in the article, the current monopoly allows big banks to earn high profits ‘far too easily.’ Breaking up that monopoly is intended to increase competition and make it easier for private capital to participate in the finance sector.

Is there a timeline for when these banking reforms might happen?

The article does not provide a specific timeline. It says Wen is stepping down later in the year and may try to press reforms in his final months, but whether and when changes will be implemented remains unclear.

What should everyday investors watch for after Wen Jiabao’s comments on state-run banks?

The article itself doesn’t offer investment advice, but it suggests investors should monitor policy signals, announcements about financial-sector reform, and shifts in Party consensus—because those political developments will influence whether the proposed changes to state-run banks move forward.