Yukon Huang: Break Up China’s ‘Big Four’

What is the problem with China’s banks?

Governance is the issue in a state-dominated activity that provides the glue for much of China’s economy. The incentives for prudent risk taking and adherence to commercial objectives are weak for these banks given their near monopoly position and government interventions. In this environment, admonitions for improved management can only go so far.

The challenge is to introduce more competition in a system that politically will continue to be dominated by the state and where vested interests are exceptionally strong. Given this reality, there are nevertheless actions that could help improve performance. One would be liberalising entry of foreign banks whose presence in China is miniscule at present. This would spur competition and innovation and, contrary to what is believed in China, strengthen rather than weaken the performance of state-owned banks.

A more radical action would be to confront China’s own version of the west’s problem of their banks being “too big to fail”. The counterpart for China is that the big four state-owned banks are “too big to manage”. Breaking them up into three regional banks each would be a powerful means to foster competition and improve governance. This has been a process that has worked well before when China split its national airline into numerous regional entities which then subjected to market pressures resulted in a manageable number of more efficient but still state-owned companies.

These split-up banks would be headquartered in various provinces rather than in Beijing and thus less influenced by politically driven mandates but more by the real needs in their localities. They would not be restricted to operating only in their originating regions but could expand elsewhere and eventually develop a national presence. But they would need to become more commercially oriented and efficient to survive. In this process, some of them would be motivated to seek external partners, as has happened with the airlines, and this would help open the door for increased foreign participation and provide support for further liberalisation.

The author is senior associate at the Carnegie Endowment and a former World Bank country director for China

For entire commentary, see:  http://blogs.ft.com/the-a-list/2013/01/29/chinas-banks-have-become-too-big-to-manage/?ftcamp=crm/email/2013129/nbe/ExclusiveComment/product#axzz2JPmiEGoH