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China Needs to Break Up Big Banks to Maintain Growth: Economist

Breaking up China's biggest banks would be the "most aggressive reform measures" seen in post-1978 China, a Beijing-based economist told CNBC on Wednesday, adding that it was badly needed if growth in the world's second-biggest economy was to be sustained.

A branch of the Agricultural Bank of China, the third-largest bank in the country by assets and the fourth-largest by market cap. China's new stress tests are aimed at ensuring banks have enough capital in the eventuality of a property market correction.
AFP | Getty Images
A branch of the Agricultural Bank of China, the third-largest bank in the country by assets and the fourth-largest by market cap. China's new stress tests are aimed at ensuring banks have enough capital in the eventuality of a property market correction.

The Big Four Banks, as the largest state-owned lenders are known, cannot continue to be merely a "government financing arm," Alistair Thornton, China Economist at IHS Global Insight said. What the country needs is a commercialized banking sector, he added.

Thornton's comments came after Premier Wen Jiabao said Tuesday that lenders make money "far too easily" and their monopoly on financial services has to be broken if cash-starved private enterprises are to get timely access to capital.

Indeed, the inability for non-state-owned firms to access capital is one of the main hurdles to growing the private sector, and a breakup may be necessary, Wen said.

"Frankly, our banks make profits far too easily," China National Radio quoted Wen as telling local businesses at a roundtable discussion. "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," the radio news service reported Wen as saying on its website.

According to Thornton, banks need to be pushed into more competition, eroding their vastly profitable net interest margins and forcing them away from lending solely on the basis of state relationships.

"This would not only funnel much-needed credit towards SMEs (small and medium enterprise) and the private sector, but also help to bring down the high corporate savings rate that is a major driver behind China's imbalances," Thorton told CNBC Wednesday in an email.

However, the banking sector is so established that some analysts are not convinced that any drastic change would happen soon.

The Big Four Banks -- Bank of China , China Construction Bank , the Agricultural Bank of China and Industrial and Commercial Bank of China -- controlled 58 percent of all retail deposits in the country in 2011, according to a report by consulting firm McKinsey. They also controlled more than 30 percent of new loans.

Jim Antos, banking analyst at Mizuho Securities in Hong Kong, said reforms to allow private ownership in banks - starting in Wenzhou is really a "very, very small effort."

"You would not expect something like the opening of 100 new banks because opening up the sector to new players who have no experience in operating banks would have risks," Antos said. "It's an expression of intent. It's not an expression of reality."

"If China were to go down this route, it would take something like 20 years before it became reality," he said.

Reuters contributed to this article.

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