China’s first fully private bank since 1949 will open by March next year, a milestone in the country’s financial reform, with the aim of providing credit to companies and individuals that find it hard to obtain financing.
Since the central government announced in July that it would approve private banks, groups of companies around the country have been racing to apply to the China Banking Regulatory Commission (CBRC).
So far, it has received 17 applications — four from Guangdong, three each from Zhejiang and Jiangsu, two each from Beijing and Shanghai and one from Chongqing, Hubei and Fujian.
The new institutions will be the fourth tier of the banking system after policy banks, big state-owned banks and city commercial banks. Their remit will be to serve individual entrepreneurs, farming businesses and small and medium-sized companies which find it hard to obtain credit from banks, forcing them to the grey market where interest rates are higher and regulations erratic.
The CBRC has set conditions for this new class of bank — share capital of between 500 million and one billion yuan with a maximum shareholding of 20 per cent for the lead investor; there should be no more than 20 shareholders, with the others holding no more than 10 per cent and a maximum of 2 per cent for individuals. As the performance of the bank improves, it will be able to increase its share capital.
Each bank must have a lead investor sufficiently strong to avoid interference from outside people or companies. The company must have had three years of audited profits and its investment must be income legally earned and not borrowed. The bank cannot lend to the lead investor.
The scope of the new banks will be limited to providing financial services to individual entrepreneurs, agricultural companies and small and medium-sized firms in their areas; in principle, they will not be allowed to set up branches outside this area.
The final issue is risk management. The CBRC wants the shareholders to be responsible for risk and to provide more capital if needed. The final details have not been worked out — what form of insurance the shareholders have to take out. The CBRC wants to avoid the state being liable in the event of a bank run or closure.
The attraction of setting up a bank is evident. Finance is one of the most profitable sectors in China, with the spread between rates on deposits and loans set by the central bank. Chinese are the most prodigious savers on earth, with total individual deposits reaching a record 43 trillion yuan at the end of August. The per capita average is over 30,000 yuan, far above the world average.
A bank license would give the lead investor and the other shareholders enormous prestige and influence in their city, as well as a healthy profit.
Among the frontrunners for a license are Wenzhou Shangye Bank, funded by firms in the city; Suning Bank, funded by the electrical retailer, and Zhongguancun Bank, funded by IT firms in Beijing. Also bidding are Fuxing of Shanghai, Lifan of Chongqing, Alibaba of Hangzhou, Tencent of Shenzhen, Meidi of Guangdong and Yulun of Jiangsu.
China’s financial industry is dominated by state banks which are among the largest in the world. The third tier of urban commercial banks, such as those in Dalian, Shenyang, Jinzhou, Tianjin and Ningbo, are owned by the city government.
The post-1949 government has been unwilling to allow the private sector to control banks partly for ideological reasons and partly because it is nervous of controlling the financial risk: what would be the social and financial consequences of a run on a bank, as has happened in many developing countries? Since 1949, only one bank — Hainan Development Bank – has closed. When other banks faced financial difficulty, the government judged it better to shore it up than allow it to go bankrupt and threaten public confidence in the whole banking system.
China has two banks that are semi-private. China Minsheng was set up in January 1996 to lend to small and medium-sized enterprises, with most of its shareholders non-government companies. Set up in March 2002, the Bank of Taizhou in Zhejiang was an amalgamation of eight local credit unions. Both have prospered, encouraging the CBRC to allow this new initiative.
In its annual report for 2012, China Minsheng announced a net profit of 37.56 billion yuan, up 34.54 per cent from 2011. Its total assets grew 44 per cent year on year to 3.21 trillion yuan while gross liabilities climbed 45 per cent to 3.04 trillion. Its non-performing loan ratio was 0.76 at the end of 2012, an increase of 0.13 percentage points from a year earlier.
Mark O’Neill, a Hong Kong-based journalist and author, writes on Greater China. He has worked as a correspondent for the South China Morning Post in Beijing and Shanghai.