Wen Jiabao gets it, but no one cares

On Tuesday (3 April 2012) major media outlets reported that Chinese Premier Wen Jiabao was getting ready to take on China's giant state-owned banks. He was quoted in an article in the Wall Street Journal:

Let me be frank. Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly...To break the monopoly we must allow private capital to flow into the finance sector.

Setting aside the fact that there are too many banks in China for any one to have a monopoly (let us not forget that the "mono" part of monopoly means "one") Wen's criticism was definitely warranted. China's top five banks account for more than 55 percent of loans in China's banking system.

On Tuesday I posted this WSJ article on Facebook and offered the comment that, "what Wen really means is that the dominance of the big state-owned banks needs to be broken so that privately owned banks are better able to compete for lending business. There are plenty of banks in China. The problem is that the biggest are state-owned and are managed according to political, not economic, principles."

But that isn't the whole problem. The other part of the problem is that, as long as China's major industrial firms are also state-owned, they will be considered by bankers to be a better credit risk than private firms, and they will absorb most of the funds available for lending.

It isn't that private firms are necessarily a poor credit risk.  Indeed, some (possibly most) private firms are better managed than state-owned enterprises (SOEs), but unlike the SOEs, the private firms aren't backed by the full faith and credit of the central government. Consequently, China's private sector continues to be starved of funding.

On Thursday (5 April 2012), George Chen of the South China Morning Post wrote an article entitled "Bankers Reject Wen's Criticism." (Sorry, SCMP is behind a paywall.)  Some of the quotes in this article are simply golden. It's almost as if China's bankers wanted to help me make my argument. One unnamed senior bank executive was quoted:

I don't think it [Wen's comment] is a fair comment. Because we're a state-owned bank, much of our business and loans are to support whatever the government needs, for example to support the growth of many state-owned enterprises. We must listen to the government, which already gives us a lot of orders and guidelines.

Right there you have an explicit admission that "the government" wants the banks to support the SOEs. Of course, we already knew that, but it's nice occasionally to have insiders admit as much.

What I find strange about this response from a senior banker is that he apparently does not associate Wen Jiabao with "the government" -- which is odd since the Premier's job description is "Head of Government."

What this tells us is, first, that Wen Jiabao's views, if they were ever considered to carry any weight, are no longer deemed worthy of respect. Even though he'll be Premier until next March, in the eyes of many, he's already a lame duck.

Second, if the Premier isn't calling the shots, then someone else -- whoever this senior banker considers to be "the government" -- is calling the shots. And whoever that is (and I'm sure it's a faction of the senior leadership) is still not interested in opening up China's industries to free and fair competition from the private sector.

In my forthcoming book, I make what I believe to be a very strong case for the fact that China's insistence on state dominance of its major industries is stifling the country's innovative capabilities. This latest episode with the banks just further confirms my belief that the powers that matter have yet to see a connection between state dominance and China's continued reliance on copying of foreign technology rather than development of its own.

Wen Jiabao gets it, but he already has one foot out the door.