Chorus swells in support of banks break-up

PUBLISHED : Monday, 28 October, 2002, 12:00am
UPDATED : Monday, 28 October, 2002, 12:00am

Calls have resurfaced for the break-up of China's big-four state banks.

'China needs competitive banks, not large banks,' Salomon Smith Barney senior economist Huang Yiping said. 'We believe breaking up at least some of the large banks is necessary to avoid the 'too big to fail' problem.'

Mr Huang's latest call comes in the wake of a chorus of appeals from mainland-based critics, who have long urged policymakers and regulators to split up the big four to end the control they exert over the financial system and promote effective competition.

The targets of the critics are the Industrial and Commercial Bank of China (ICBC), the Bank of China, China Construction Bank and the Agricultural Bank of China - which between them control 70 per cent of the country's overall banking assets.

The sheer size and reach of the big four throughout the financial system means Beijing cannot afford to have any one of them fail, which raises considerable concern in the minds of critics over 'moral hazard'.

The big four rank among the world's largest in terms of assets, though they lag well behind by most performance and credit quality measures.

The asset size of ICBC, which is about half that of Citigroup, is equivalent to 45.3 per cent of China's gross domestic product last year. By comparison, Citigroup's assets amounted to just 6.4 per cent of the United States GDP, while Deutsche Bank's asset base amounted to 5.1 per cent of German GDP, Mr Huang said.

'Splitting the big banks into smaller ones could break down monopolies and promote competition. Scale efficiency doesn't automatically come with size,' he said.

The break-up would also make banking reforms more effective and facilitate strategic alliances and public listings.

'Given the state banks' size, not many institutions could afford to hold even a small proportion of their equity. The break-up could improve the banks' quality and affordability for investors, although the 15 per cent cap [applied to foreign stake-holdings] will remain a constraint,' he said.

Mr Huang said a break-up of the big four would help fight the 'liquidity trap' conditions - one of the main problems affecting China's economy and its banks - in which lowering interest rates had no impact on channelling banking liquidity into the hands of borrowers.

Long accustomed to central planning, the banks face a lack of policy flexibility. Mr Huang said the split could reduce bureaucracy and improve the effectiveness of any reform measures.

'To make the break-up more effective, the government needs to clean up some banks' books, liberalise interest rates, prevent the new banks being captured by local banks and strengthen bank supervision in order to prevent excessive competition,' he said.

Tackling the big four's market dominance on the mainland has long been the thorniest of challenges confronting China's policymakers. The Asian financial crisis triggered some urgency about tackling the problems head-on.

Now Beijing attaches great importance to banking reforms because they are the key to overcoming the 'liquidity trap' conditions and supporting economic growth, according to Mr Huang.

China also needs to clean up its state banks' bad-debt problems to avoid posing serious risks to its currency and the financial system when it fully opens up its capital market and lifts control on the capital account.

The yuan is now convertible only on the current account.

Elimination of existing bad debts and improvement in new assets were critical for averting a fiscal crisis, Mr Huang said.

Although the break-up case was entirely based on economic considerations, the decision could be a political one, he said.