China’s move to allow the establishment of private banks is the most important development in the country’s financial sector, if not the whole economic field, so far this year.
The landmark decision will break up state monopoly, help alleviate funding problems for small and medium-sized enterprises and foster a mulitilayer financial market.
The central leadership started to seriously consider allowing private investors to set up banks in 2012, when then premier Wen Jiabao criticized state banks for making easy money by taking advantage of their monopolistic position. Since then, policies were mapped out and preparations were made for the establishment of private banks.
Even before the green light was given, private investors have been allowed to invest in banks of all sizes. For example, two major national banks — China Minsheng Bank and China Merchants Bank — have seen private capital taking a bulk of their stakes. There are also many city commercial banks that have private investors as major shareholders.
But these banks have one thing in common. They are still controlled by the government in one way or another. Their executives are appointed by the government and their operations are subject to government intervention. Private investors are simply there to provide capital but they hardly have any significant say in banks’ decision-making and operations.
This state of affairs will change with the establishment of the first group of private banks in their real sense. According to available information, the three banks – in Shenzhen, Wenzhou and Tianjin – are all funded by private companies. The private investors will have a full say in the banks’ operations. In this sense, they will be the first genuine private banks in China.
The emergence of these banks will definitely inject competition into a sector that is tightly controlled by the state. Although state monopoly will not be significantly shaken, private banks will crack the sector open.
Private banks will most likely start making headway in SME financing, innovation and services. Their success will push their larger state counterparts to change and improve.
Compared with state-owned giants, private banks are made of different genes that naturally draw them closer to SMEs. If the stakeholders of a bank are mostly private business owners who started from scratch to be where they are now, they are likely to have a better understanding of small businesses and an inborn friendliness towards them.
State lenders tend to prefer government-backed behemoths because they believe SMEs, without financial brawn and state support, are prone to default on their loans.
But with business acumen and a well-built information network in the local market, private banks can excel in the market.
More important, private banks are likely to be more creative thanks to the participation of internet companies. Internet giant Tencent Holdings is among the major stateholders of the private bank in Shenzhen. Alibaba Group is expected to join the next group of private banks.
Players like Tencent and Alibaba have huge client bases, wide databases of small businesses, self-established and time-tested credit assessment systems, solid reputation and strong technological capabilities.
Their participation is expected to better serve SMEs and individual investors, and result in more creative financial products.
One recent example of private internet companies forcing state peers to change was set by internet giants Alibaba, Baidu and Tencent. Their money-market funds, in cooperation with traditional fund managers, won the hearts of hundreds of millions of small investors with high liquidity, handsome return rates and greater investor convenience. The products actually helped small investors to bypass the deposit ceilings placed by the traditional banks. This prompted some banks to roll out similar financial products.
Another example of how internet companies can help SMEs in financing came last month when Alibaba launched an unsecured-loan program. SMEs can apply for a credit line up to 10 million yuan, from several banks such as Bank of China, China Merchants Bank and China Construction Bank, based on their credit records tracked in Alibaba’s database. The loan rate is no more than 8 percent, not very high for small businesses. SMEs in China often pay an annual interest of 12 to 15 percent on their loans.
Alibaba has yet to secure regulatory approval to set up its own bank, so it has to cooperate with other banks. But, if Alibaba gets a banking license, it will definitely pose a strong challenge to state banks.
For the time being, private banks won’t grab too big a market share from state banks because private banks mostly serve SMEs. But when these private banks’ client base grows, they will eventually step on the turf of large state banks.
This will force state lenders to shape up, improving their service and cutting interest rates to keep their customers.
Clearly, with more private banks setting up in the future, the landscape of China’s banking sector will change, with the overall efficiency of the sector expected to be enhanced.
The author is an economic commentator.
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