The New Comer

With the go-ahead from the government, private banks can’t wait to seize a place at the table By Deng Yaqing

After the first private bank—China Minsheng Banking Corp.—was set up in 1996, China’s private banking sector underwent a period of stagnation. Today,things have turned around. In July, the Chinese Government made clear its intention to explore the establishment of private banks invested by private capital.

Ignited by the signal to open up the banking industry, dozens of private enterprises have submitted applications to set up private banks, including China’s biggest appliance chain Suning Commerce Group and Internet giant Tencent Holdings. In fact,private capital, hitherto, has accounted for a considerable share of China’s banking sector. However, out of concerns over fi nancial risks and protecting the rights and interests of depositors, China’s regulators have taken a cautious attitude toward the promotion of private banks.

Wang Lianzhou, an expert on fund investment and management, said that China’s financial reforms have lagged behind its economic reforms. The establishment of private banks, he said, will break the monopoly of large state-owned banks, expand the availability of capital and better meet the development demands of rural areas and small and mediumsized enterprises.

The policy shift to allow more private banks in China has generated a lot of interest, particularly from some unexpected players.

On September 16, Alibaba Group formed a strategic alliance with China Minsheng Banking Corp. to cooperate in banking services, marking a closer step toward offering fi nancial services to online shoppers by the country’s largest ecommerce company.

Predating the move, Alibaba Financial China Holding Ltd. began offering money management products like depositing and lending through Alipay. Yu’ebao, an online fund investment service that was launched by Alibaba Group’s online payment unit on June 13, has been considered as a pioneer entering the territory of traditional banking. The product allows customers to buy money market funds and other financial products with idle cash in their Alipay account. Moreover, funds in Yu’ebao accounts can also be used for online shopping.Just one week after its debut, more than 1 million customers signed up for an account.

Suning Commerce Group, another e-commerce player, has also submitted an application.Due to its massive network of offline chain stores across the country and its new platform to boost its e-commerce business, Suning has an upper hand. Hu Yanping, founder of the Internet data center under the market research firm DCCI, believes commercial entities with offline branches would be better received by customers. If Suning’s storefronts are allowed to establish banking outlets in the future and interbank networking, the company could quickly become a leader in the private banking industry.

Besides e-commerce companies, those eyeing the prize of private banking also encompass Internet companies and traditional industrial enterprises, each of which possess unique advantages. Currently, Tencent’s Tenpay and WeChat’s payment services are witnessing increasing cash fl ows.

Special role

In an article published inQiushimagazine on September 16, China’s central bank governor Zhou Xiaochuan mentioned the importance of fi nancial innovation and Internet fi nance. He also wrote that private banks should be geared to increase lending to small and medium-sized enterprises and expand fi nancial services in rural areas.

The view was echoed by Zhou Dewen,Chairman of the Wenzhou Small and Medium-Sized Enterprises Development Association,who argued that China has no shortage of large national banks. Private banks should be directed to better serve the financing needs of local small businesses rather than pursue large-scale expansion without any focus.

Zuo Xiaolei, chief economist with Beijingbased China Galaxy Securities Co. Ltd., believed the promotion of private banks was a re fl ection of market equity, showing that private capital can do what government capital has been doing. But she stressed that the government is relying on private banks to solve financing problems faced by small businesses and that expectations may be too unrealistic, at least in the short term.

“High hopes have been placed on private banks,” noted Tian Huang, Marketing Director of Shenzhen Kingdee Software. At the macroeconomic level, private banks can severely put a dent in the monopoly of state-owned commercial enterprises and improve fi nancing ef fi ciency. At the microeconomic level, they are expected to alleviate the fi nancing constraints faced by small private enterprises in cities and rural areas, where private village banks are gaining momentum.

Supervision and insurance

Since China does not have a deposit insurance system in place, state credit has provided an implicit guarantee for state-owned commercial banks. That is to say, if these banks fail, the government would swoop in to bail them out.

Yet, authorities have not made clear how private banks should bear any risks themselves. Without the establishment of deposit insurance and bankruptcy systems, private banks cannot enter the banking industry on a large scale.

“Compared with Western countries, China is accustomed to strictly controlling financial market access. The threshold for private capital should be lowered, but supervision and risk control need to be strengthened so that the interests of all parties concerned can be secured,”said Wang.

What risks would private banks probably suffer? At a seminar held by China Society for Finance and Banking in August, Guo said there are three kinds of risks at play. “First, private entrepreneurs don’t know the ropes. Second,private banks may engage in connected transactions, which may lead to unfair competition.Last, bank owners may run off with the money if banks collapse.”

“Only when necessary policies and systems are implemented, can private banks be shielded from operation risks,” said Guo.

On the other side, with e-commerce and Internet companies flocking to the banking industry, the supervision of Internet finance is of prime importance. At the 2013 China Financial Innovation Forum, Wu Xiaoling, Deputy Director of the Financial and Economic Affairs Committee of the National People’s Congress, suggested setting up a two-layer regulatory framework for Internet finance. She argued that financial activities involving public funds should be supervised by the People’s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission, while financial intermediary services and activities that are concerned with just a few investors should be supervised by local authorities.

“When private banks actually enter the market, it’s very expensive and dif fi cult for them to set up of fl ine banks independently,” said Wu. “So Internet-based banking is an inevitable step.”