Wen’s Last Reform Push

By John Richardson

Wen Jiabao has been at it again. His extraordinarily strong comments on Tuesday follow those he made last month about the risks of a return to the economic chaos of the Cultural Revolution.

On this latest occasion, he has taken aim at the state-owned banks. China’s premier, who is to relinquish power later this year, believes the banks make money “far too easily”, and that their monopoly control of lending is starving private enterprise of financing.

We saw this last year as small and medium-sized enterprises (SMEs), which make up the bulk of chemicals and polymer buyers, struggled to obtain official lending. They were forced to increasingly turn to the “shadow bank system,” thus paying exorbitantly high interest rates, as the central government reduced the amount of money the state-owned banks could lend in order to tackle inflation.

A tight rein on official bank lending has continued into 2012. This is one of the main reasons why chemicals and polymer buying continues to be “hand to mouth”.

Wen’s comments follow the announcement in March of a trial scheme in Wenzhou. Private investors in the eastern city will be encouraged to buy into local banks and to set up financial institutions, such as loan companies and rural community banks, said the State Council.

But resistance to further reforms is inevitable because of strong “vested interests”, which we discuss in chapters 6 and 10 of our e-book, Boom Gloom & The New Normal.

The misappropriation of funds flowing from the state-owned banks to the state-owned enterprises (SOEs) has made some individuals very, very rich. Between 16,000-18,000 government officials and executives from the SOEs stole $123bn of public funds between the mid-1990s and 2008, says The Economist, quoting data from the People’s Bank of China.

Successful financial-sector reforms are essential if China is to escape the “middle income trap”.

SOEs need to be made to work harder to obtain financing. No longer should they be allowed to add industrial capacity, easily funded through their cosy relationships with the state-owned banks, that fails to add sufficient value to the economy.

Private companies must also have greater access to finance. It is this sector of the economy that has the potential to be the main driver of the innovation necessary for China to escape the middle income trap.

But can any of this realistically happen given that politics in China, like everywhere else, is the art of the possible?

And even if China’s new leaders are as reform-minded as Wen has attempted to be during his decade in office, they will take time to settle in. They might need several years to build-up the confidence, and the political muscle, to take on the vested interests.

Can China afford to wait that long? 

, , , , , , , , ,

Leave a Reply