China Herald: Private companies take economic lead

William Overholt

Private companies are taking the lead in generating economic growth and jobs, tells William Overholt, senior research fellow at the Kennedy School of Government Reuters. But they need drastic financial reform to do their work, and legalizing borrowing announced for Wenzhou could be a first step.

Reuters:

Only last week, Beijing approved financial reforms for Wenzhou - known as the country's cradle of private enterprise - to encourage private investment in local banks. Experts said the need for further steps was apparent, though it remained to be seen whether the views of Wen, due to step down next year in China's biggest leadership change in a decade, would translate into action under the new leadership.

"The basic need for drastic financial reforms is clear," said William Overholt, senior research fellow at the Kennedy School of Government at Harvard University and author of "Asia, America, and the Transformation of Geopolitics."

"This is a time in China's economic history where future growth, and future jobs, depend heavily on small and medium enterprises and the private sector." The Big Four banks, including Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China and China Construction Bank , have long maintained a stranglehold on virtually every aspect of the financial services industry...

The local central bank branch estimates underground lending in Wenzhou at 110 billion yuan. About a third of that is used for real economic activities, with the rest going to speculative investments, according to media reports.

"It's worse than the mafia," Harvard's Overholt said, referring to punitive borrowing costs. "When you control inflation by high reserve ratios, what the banks do is cut off everybody but their biggest clients." "The financial system is strangling them."

More in Reuters. William Overholt is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.