File photo shows China's Premier Wen Jiabao
China's Premier Wen Jiabao, warned against several problems emerging in 21st century China, including the rising wealth gap, institutional corruption and a deep seated public distrust of government. REUTERS

China's state banks 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, state media cited Premier Wen Jiabao as saying on Tuesday.

Wen's comments, carried on China National Radio, come days after Beijing gave the go-ahead for financial reforms in Wenzhou - known as the country's cradle of private enterprise - that will encourage private investment in local banks.

Frankly, our banks make profits far too easily. Why? Because a small number of major banks occupy a monopoly position, meaning one can only go to them for loans and capital, China National Radio quoted Wen as telling local businesses at a roundtable discussion.

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.

The 69-year-old premier is set to step down next year in China's biggest leadership change in a decade.

But experts say his comments reflect longheld views on the need for private firms - an increasingly large player in the world's No. 2 economy - to access capital.

Everything's in the details. But the basic need for drastic financial reforms is clear, said William Overholt, a senior research fellow at the Kennedy School of Government at Harvard University and author of Asia, America, and the Transformation of Geopolitics.

This is a time in China's economic history where future growth, and future jobs, depend heavily on small and medium enterprises and the private sector.

The Big Four banks, including Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China and China Construction Bank, have long maintained a stranglehold on virtually every aspect of the financial services industry.

But in past years, Beijing has carried out a range of reforms in cities such as coastal Wenzhou. Last month, the Cabinet approved a pilot project it hopes will one day form a cornerstone of nationwide financial sector reforms.


Private investors in Wenzhou will be encouraged to buy into local banks and to set up financial institutions such as loan companies and rural community banks, the State Council said in a statement posted on the government's website last week.

Beijing hopes that cash-starved small businesses - vital to employment in the world's second-largest economy - will be able to access financing more easily and cheaply.

The central government is unified on this, and you've seen the Wenzhou experiment ensue. I think, Wenzhou has had some successes, that should be replicated nationally, Wen was cited as saying. In fact, some can immediately be kicked off countrywide.

Allowing private investors to lend via legal entities will also help Beijing tame an underground lending market, where annualized interest rates can reach 100 percent.

The People's Bank of China estimated that market at 2.4 trillion yuan ($381.1 billion) as of the end of March 2010, or 5.6 percent of total lending.

Many private businesses turn to grey-market lending because they lack the connections to access loans at official rates, which primarily flow from state-owned banks to state-owned enterprise.

The idea of a financial reform zone emerged late last year after media reports surfaced about Wenzhou entrepreneurs who had gone into hiding or committed suicide after they were unable to repay high interest on under-the-counter loans.

The local central bank branch estimates underground lending in Wenzhou at 110 billion yuan. About a third of that is used for real economic activities, with the rest going to speculative investments, according to media reports.

It's worse than the mafia, Overholt said, referring to punitive borrowing costs. When you control inflation by high reserve ratios, what the banks do is cut off everybody but their biggest clients.

The financial system is strangling them.

Editing by Xavier Briand