China has to break the monopoly held by giant state-owned banks to help smaller companies secure loans, premier Wen Jiabao argued.

The top five commercial lenders reported a combined net profit of  ¥681 billion in 2011, representing 65% of the total earnings reaped by all banks during the same year, figures from their annual reports showed.

"It is too easy for our big banks to make money," Wen said on Radio China. "The central government has made the decision to break their monopolistic position to make loans more accessible to nascent, promising startups."

Wen's comments came after a pilot reform program was unveiled last week in Wenzhou - a city in Zhejiang province known for entrepreneurship and active underground lending - to address China's rigid and inefficient financial system.

The private lenders in the city will be officially allowed to lend to small and midsized businesses, and local residents would be allowed to invest in foreign capital markets, according to the local commerce bureau.

Wen said the experiment in Wenzhou would likely expand to other cities soon.

China's economic vitality and employment market have never been so dependent on small businesses, according to William Overholt, a senior analyst with Harvard Kennedy School.

Shadow lending, or illegal loans offered by individuals, totaled ¥2.4 trillion in the first three months of this year, equivalent to 5.6% of total bank lending during the same period, the People's Bank of China (PBOC), the central bank, estimated. The size of shadow lending in Wenzhou was projected to be worth ¥110 billion, one-third of which went to brick-and-mortar economic sectors and the rest to speculative activities, according to PBOC's Wenzhou branch.

Ending the big-bank monopoly is expected to clamp down on underground lending and better regulate the nation's banking system.

$1 = ¥6.3

 

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