online banking

China's central bank to better regulate internet banking as private lenders start to mushroom

PUBLISHED : Monday, 13 July, 2015, 2:36pm
UPDATED : Monday, 13 July, 2015, 3:34pm

China’s central bank is preparing a new piece of legislation on internet banking, at a time when Premier Li Keqiang is pushing his “Internet-first” policy and several Chinese internet firms are launching private banks.

The legislation has been approved by the Central Committee and State Council, China's cabinet, and is expected to be announced soon, according to Zhang Tao, director of the legal department at the People’s Bank of China.

During a financial summit in Shanghai on Sunday, he said the new set of rules, called “Guidance regarding the promotion of healthy development in internet banking”, would focus on encouraging innovation, preventing risk, promoting the industry’s healthy development amid an ordered market, and pushing open competition. 

This could help plug a crucial gap as China’s state-run lenders have been criticised for favouring state-owned firms over individuals and small businesses due to the lower level of risk. 

In addition to offering smaller firms more liquidity and the opportunity to grow, the rise of an internet banking industry is also seen as a potential means to accelerate financial reform in the rest of the banking sector.

The shift comes as a number of major Chinese companies are taking an interest in private banking. 

In January, China’s top internet services portal Tencent created WeBank, the country’s first private bank, with registered capital of 3 billion yuan (US$482 million). 

This was soon followed by Ant Financial's MYbank, based on an initial investment of 4 billion yuan. The financial affiliate of Chinese e-commerce giant Alibaba said the bank would issue loans of up to 5 million yuan.

READ MORE: Alibaba’s new internet bank hits regulatory obstacles

Dalian Wanda, China’s biggest private property developer, and smartphone giant Xiaomi are also known to be eyeing the market. 

Xiaomi is in early negotiations to open a private bank with registered capital of around 3 billion yuan, according to a report on Friday by Sichuan Hebang Industry Co., Ltd.

Both Tencent and Alibaba, the largest stakeholders in WeBank and MYbank, respectively, already offer consumer deposit-like investment products with higher returns than a normal bank savings account. 

But setting up private banks would see them play a bigger role in the financial services sector by collecting deposits and administering assets independently.

However, a number of stumbling blocks remain, from choosing a suitable business model to dealing with mobile security and awaiting a clear direction from Chinese regulators. 

Tang Jiacai, MYbank’s Chief Information Officer, said that “because the regulatory authorities have not yet approved the opening of accounts [online], that has greatly affected the products we had originally planned.”

Moreover, the bank aims to have no brick-and-mortar branches but rely on face-recognition technologies so users can open accounts remotely. Yet such technologies have been shown to be rife for abuse.

Jim Antos, a banking analyst at Mizuho Securities Asia, told the Wall Street Journal that new technologies could present serious risks if internet-only banks are not properly regulated.