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From: Matthews Asia <info@matthewsasia.com>
Date: 13 April, 2012 8:21:55 AM PDT
To: <computerdiy@yahoo.com>
Subject: Weekly Asia Update: China's Financial Reform
Weekly Asia Update
April 13, 2012
Pedestrians walk past a bank in Beijing.
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China's Financial Reform
Over the past few years, investors have had concerns about Chinese banks with respect to slower loan growth and the potential for bad debt connected with local government financing vehicles. While 2011 was a difficult year for China's economy, its banks actually posted solid earnings growth—so good, in fact, that last month, Chinese Premier Wen Jiabao declared that the country's largest state-owned banks make money "too easily." He added that their control on lending is "limiting the growth of independent businesses" and that the banks form a monopoly that needs to be broken up. To remedy this, the central government agreed to allow private capital to enter the lending market.
Major banks, which dominate China's lending market, have reported strong profits thanks to a very extensive network of bank branches. And since the government regulates both the deposit rates that banks pay and the lending rates they charge, the banks enjoy a very healthy spread between loan and deposit rates.
To further evaluate this issue, my colleagues and I recently made a trip to Wenzhou, a city known as the country's cradle of private enterprise. The central government recently gave Wenzhou the green light on financial reforms to offer alternatives to current lending channels.
During our trip, we met with more than a dozen entrepreneurs across several industries. We came away impressed by the innovative and adaptive capabilities of these entrepreneurs. We were also amazed to learn that most of them have no viable access to bank loans. Large banks prefer to lend to big state-owned enterprises, avoiding smaller private companies due to higher perceived risks. When banks do lend to smaller clients, their interest rates tend to be prohibitively high, as are rates from the private lending market. Proposed financial reforms in Wenzhou are expected to allow private capital to establish lending institutions focused on serving small and even micro enterprises. The reforms could also allow those offering private capital to set up or take shares in rural banks and credit companies. Overall, the plan is intended to legitimize private lending in Wenzhou, making the lending landscape more competitive. This, in turn, supports small- and medium-sized firms. If successful, the reforms may have a broader implication for China's overall financial system.
Hardy Zhu
Research Analyst
Matthews International Capital Management, LLC
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