China economy

China’s banks have held sway over the real economy for too long. It’s time to make them change, retired industry official says

The country’s economy is shifting gears and traditional terms of financing no longer apply, Hangzhou forum told

PUBLISHED : Saturday, 04 November, 2017, 10:03am
UPDATED : Saturday, 04 November, 2017, 10:32pm

China needs to come up with an industry policy to break the banks’ dictatorial relationship with the real economy, a former top economic official told a forum in Hangzhou on Friday.

Zhang Guobao, 73, former vice-chairman of the National Development and Reform Commission (NDRC) and director of the National Energy Administration until 2011, said Chinese banks had traditionally waited for customers to come through the door, but the lenders needed to change tack as new financial products emerged and the country shifted gears from high-speed growth to high-quality development.

“During more than 30 years of reform and opening up, the relationship between China’s financial industry and its real economy was like grandfather and grandson,” Zhang said at the Hangzhou Bay Forum. “For most of the time, the economy was weak, due to a shortage of financing.”

He said financing continued to be a burden for many Chinese businesses, particularly in the country’s northeast.

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Zhang, who headed an NDRC group to revitalise the struggling rust belt, said that in Heilongjiang, the country’s northernmost province, the average interest rate on loans was 6.2 per cent, 0.49 percentage points above the national average. Its agricultural industry, the backbone of the provincial economy, paid 7.36 per cent interest, much higher than the 2.75 per cent national average for the sector.

Worse still, many companies in Heilongjiang ended up paying 10 per cent on loans, he said.

“That is where I think the financial industry needs reform and innovation,” Zhang said. “Although banks tend to ‘love the rich and hate the poor’, they also need to get out to find good customers, and turn their unprofitable companies into profitable ones … so that more customers can pay interest to the banks.”

To achieve that, he said, the central government should have an industry policy with differential interest rates to channel financing to where it was most needed to meet national goals, such as green financing.

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Zhang said interest rates could be deployed to foster industries such as solar power and discourage others such as coal-fired electricity.

He said some local governments were continuing to approve coal power stations despite national targets to eliminate overcapacity in the sector.

“These coal-fired power stations cannot survive without the banks’ support,” he said. “Why can’t banks charge them higher interest than wind and solar power stations?”