A consensus has been reached among Beijing's top leadership to reduce, if not break, the state sector's banking monopoly, Premier Wen Jiabao said.
This was the first time that China acknowledged the monopoly of state-owned banks following last month's announcement of a pilot project to reform the financial sector in Wenzhou, an eastern coastal city with a tradition of entrepreneurship.
Wen made his remarks during a visit, from April 1-3, to companies in Fujian Province and the Guangxi Zhuang Autonomous Region.
Economists have long complained about a lack of progress in reform of the state-dominated banking and financial industry and of inadequate service for the country's large number of small and medium-sized enterprises.
In the latest session of the National People's Congress some lawmakers painted the banking sector as an "industry of windfall profits".
"Regarding raising funds for your businesses, I think it has been too easy, quite frankly, for our banks to make profits,'' Wen told businessmen during his visit.
"The reason is that a small number of large banks are in a monopolistic position. It is only from them, and nowhere else, that companies get the loans they need.
"This is why we've now come to make way for private capital to enter the financial services sector, which ultimately requires breaking monopolies. There is already a consensus among the central leadership, which is reflected, as you can see, by the pilot reform in Wenzhou.
"I think some successful practices from Wenzhou's pilot reform can be introduced nationally. Some of the practices may even be immediately implemented," the premier said.
The Wenzhou reform was announced by a State Council executive meeting on March 28. It allows private financial services, including setting up village banks and rural financial cooperatives.
Wang Jianhui, chief economist with Southwest Securities Co Ltd, said that a more competitive banking sector would significantly boost the vitality of private businesses.
"The monopoly in the sector makes getting loans expensive. Private businesses, especially smaller ones, have to get cheaper loans to flourish.''
Qiu Zhiming, president of the privately owned Beifa Group, a maker of stationery in Ningbo, Zhejiang province, said big State-owned lenders are charging his company twice as much as the benchmark interest rate by imposing various charges. He said banks always think up new ways to charge his company more and if he doesn't accept it then he does not get the loan.
"At the end of the day you find that a significant part of the profit goes to the banks," he said. "Something has to be done, urgently."
Under the current system, State-owned banks live off an effectively guaranteed spread between deposit and lending rates that are set by the central bank. The spread now stands at around 3 percentage points.
The so-called Big Four banks - Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China - raked in a combined profit of about 630 billion yuan (US$100 billion) last year against a backdrop of slowing economic growth.
Reflecting on the fat profits of banks, Hong Qi, president of China Minsheng Banking Corp, even said at a forum late last year that the sector's profit was so high but profit for industrial companies was so low that he sometimes felt upset to talk about his bank's profit. Minsheng's annual report, published in March, showed a surge in profit of more than 58 percent in 2011, to 27.9 billion yuan.
Up to 55 percent of the outstanding loans in the banking system were extended by the Big Four together with Bank of Communications, China Development Bank and the Postal Savings Bank.
Chen Wanzhi, an NPC deputy, said the banking monopoly has impeded innovation in financial products and services. The system encourages discrimination in favor of state-owned enterprises against private businesses that are desperate for credit.
Source:china.org