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UPDATED: May 7, 2012 NO. 19 MAY 10, 2012
Breaking Up Banking Monopolies
China needs to revitalize the real economy and free up capital for small businesses
By Lan Xinzhen

LENDING TO YOU: Huafon Small-Sum Loan Co. Ltd. is the first micro-credit company in Wenzhou, Zhejiang Province, where micro-credit companies are being supported by the ongoing financial reform (WANG YONGCHANG)

China is in the initial phase of a state-led financial reform, starting with its private economy powerhouse of Wenzhou in Zhejiang Province, in an effort to better support the development of the real economy.

On March 28, the State Council gave the word to establish a pilot zone for comprehensive financial reform in Wenzhou. The plan requires the city government set up a financial mechanism facilitating the locality's social and economic development. It also outlines 12 tasks for Wenzhou to focus on during the reform process, such as "encouraging and supporting participation of private capital in the reform of local financial institutions."

In April, Shenzhen, the original base of China's economic reform in the late 1970s, followed suit with a guideline for financial reform. The focus of Shenzhen's financial reform will be to serve the development of the real economy, including the introduction of pilot two-way trans-border loans between the mainland and Hong Kong, the establishment of the Shenzhen Qianhai Equity Exchange before the end of this year, and the development of the innovation bond market.

Up to now, 16 pilot zones have been set up to connect technology and finance in cities like Tianjin and Chengdu, and they are seeking further financial innovation to offer financial support to scientific and technological enterprises.

Guo Yanhong, researcher at the Research Institute of Huachuang Securities Co. Ltd., said economic readjustment is generally accompanied with opportunities for institutional improvement. In China, the recent slowdown of economic growth and the intermittent breakout and intensification of liquidity risks all substantiate the need for financial reform.

According to Guo, the old economic mechanism will face a series of challenges. To avoid economic recession, it is necessary to adopt measures to prevent the economy from shrinking. Historically, after economic crises, corresponding institutional innovations have typically followed.

"Through analysis of U.S. financial reforms, we can find that the reforms actually represented a process of financial liberalization," said Guo.

The pilot financial reforms in Wenzhou and Shenzhen also aim at pushing forward the Chinese financial mechanism. Wenzhou's reform will regulate private capital, while reform in Shenzhen will serve economic transformation and focus on incorporating capital from diversified channels into the process.

Ending state monopoly

Days after the State Council executive meeting on March 28, Premier Wen Jiabao announced that the Central Government was determined to break the monopoly in the banking sector during a visit to Fujian Province.

"I think it has been too easy for our banks to make profits," he said. "The reason is that a small number of large banks hold a monopoly in the sector. This is why we've now come to make way for private capital to enter the financial service sector, which ultimately requires breaking monopolies."

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