Private Chinese banks to get green light by year-end

Entrepreneurs rush to exploit the business opportunities arising from economic reform

PUBLISHED : Monday, 21 October, 2013, 3:56am
UPDATED : Monday, 21 October, 2013, 3:56am

The mainland's first privately owned banks under the tenure of Premier Li Keqiang are expected to emerge as early as the end of this year as private entrepreneurs rush to embrace the opportunities arising from economic restructuring.

Undeterred by a possible threshold of between 500 million yuan (HK$632.52 million) and 1 billion yuan in registered capital and the fact that their business operations will be restricted to the province in which they register, nearly 30 firms across the mainland are applying for bank licences. That is even before detailed rules governing privately owned banks are released by the regulator.

Among them, about 10 companies were expected to get the nod in the next couple of months, said a source close to the banking regulator.

Shares of the applicants have been advancing after the State Council issued a circular encouraging private investment in banks in July. Since August, Nanjing-based Suning Commerce has soared 126 per cent; Beijing Centergate Technologies surged 51 per cent; and Lifan Industry, a Chongqing-based car and motorcycle maker, rallied 33 per cent.

"The enthusiasm is understandable because of banks' hefty profits," said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences. "Such motivations are hazardous as they may lead them to assume higher risk while operating the bank."

While the 16 listed mainland banks contributed half of the profits made by China's more than 2,400 listed companies in the first half, about 95 per cent of bank assets are controlled by the central and local governments. Funding has long been directed towards government-backed companies, with small and medium-sized enterprises (SMEs) badly underfinanced despite their key job creation role in the economy.

In a bid to support China's economic transformation and unleash the potential of SMEs, the government is opening up the banking sector to private companies for the first time since the collapse of the financial empire controlled by Xinjiang Delong Industry in 2004.

While the market access given to private firms has been widely hailed as boosting competition and improving resource distribution, concerns are also growing about corporate governance.

"The establishment of several privately owned banks would have limited impact on the competition landscape, given the number of existing non-privately owned banks and the large-scale assets they control," said Liao Qiang, an analyst at Standard & Poor's.

Shareholders of privately owned banks could pursue short-term profits, such as by boosting loans and distributing dividends as soon as possible, at the expense of the lender's long-term prospects. The track record of private banks in China's financial sector has been patchy, with the exception of China Minsheng Banking, a joint-stock lender set up in 1996 by several private companies recommended by the Federation of Industry and Commerce.

In the 1980s, China allowed private firms to set up urban city co-operatives, which ended up saddled with bad loans before they were restructured into city commercial banks. In 2003, Delong controlled 13 financial institutions, including city commercial banks, trust firms and leasing companies, to facilitate funding for its non-financial businesses and speculation on the stock market. Rampant irregularities and weak internal controls almost triggered a default crisis in the financial sector in 2004 until state-owned Huarong Asset Management took over the firm and worked with regulators to settle debts with creditors.

Banks could be difficult to run because the private companies might have limited settlement channels, higher staff costs and lack of management skills, said Wu Xiaoling, a former central bank vice-governor.

Policymakers would be cautious in introducing private investors to the financial sector, learning a lesson from the micro-credit companies set up four years ago by private investors and that had now built up massive bad loans, economists said.

Zhou Wen who owns a micro-credit company and several cement plants in Jiangsu province, said he hoped the experience in operating a credit company would mean he could set up a private bank.

"After three years of operation, about one-third of our assets have turned into bad loans because of the economic slowdown," Zhou said. "Policymakers should help find a solution for credit companies like us."