Private banks to start on trial basis

Song Chen/China Daily

Authorities outline policies for restructuring and transformation

China will allow the establishment of private banks and other financial institutions funded by private investment on a trial basis.

The government made the announcement after the State Council formulated policies to support economic restructuring, transformation and upgrading.

Shanghai Securities News reported on Wednesday that the China Banking Regulatory Commission has asked provincial governments to make plans for the establishment of private banks and submit their plans to the commission.

Insiders said a proposal made by a province in eastern China suggested minimum deposits of 500,000 yuan ($82,000). The suggestion could protect deposits by members of the general public from potentially high risks, but may also discourage private enterprises from opening banks.

On Sept 16, Zhou Xiaochuan, governor of the People's Bank of China, published an article in Qiushi Journal calling on the government to relax restrictions on private investment entering the financial market, and to support the establishment of private banks.

Zhou also emphasized the importance of introducing an insurance system for deposits to create a fair competitive environment for financial institutions.

Yang Tao, a researcher at the Institute of Finance and Banking at the Chinese Academy of Social Sciences, said: "The government should adopt the following principles on the development of private banks: In terms of ownership, private investment must hold a controlling interest in the banks; in terms of management, the banks must build their internal power structures independently, operate independently, and assume full responsibility for their profits and losses. In other words, only privately owned and managed banks are real private banks."

By the terms of Yang's definition, the number of private banks in China is limited. Despite years of market-oriented reforms, only China Minsheng Banking Corp has the basic features of a private bank. Moreover, only a small number of city and rural commercial banks are privately controlled and have broken away from local government intervention, said Yang.

Although the China Banking Regulatory Commission has yet to issue detailed regulations for private banks, China Business News recently reported that one unnamed local government has already provided the commission with a draft document on the supervision of the pilot private banks. According to the draft, the founders of a private bank must provide 500 million yuan ($82 million) to 1 billion yuan as registered capital and the number of shareholders should not exceed 20. In addition, the largest shareholder and related parties will only be allowed to hold shares equivalent to no more than 20 percent of the bank's total share capital.

Shares surge

By late September, 27 listed companies or their major shareholders had submitted applications to establish private banks, or had revealed plans to do so, and the number of applications continues to rise. Since the start of the year, the State Administration for Industry and Commerce has approved at least nine names for prospective private banks, including Suning Bank, according to China National Radio.

In a statement released on Aug 23, the home appliance retailer Suning Commerce Group said it had submitted an initial plan to establish a private bank, but is still awaiting operational details and government approval. The market obviously sees potential in the idea - shares in the Shenzhen-listed company have surged 81.9 percent in less than three months, from 7.53 yuan on the day before the announcement to 13.7 yuan on Oct 14.

Banking-related shares have also risen sharply during the last two months and are expected to continue advancing over the short term. Shares of Guangzhou KingTeller Technology Co, which manufactures ATMs, surged by the daily 10 percent limit on Oct 8, as investors reacted to news that the company plans to establish a private bank in collaboration with other Guangzhou-based enterprises.

The media and social networking sites have been inundated with speculation that a number of well-known companies, including the e-commerce giant Alibaba Group, and Tencent Holdings Ltd, one of China's biggest Internet companies, had joined the competition to establish their own private banks.

Tencent confirmed that, as a minority shareholder in a financial group seeking a banking license, it will use its online platform and user interface to supplement the group's financial services. However, the company denied that it is planning to apply directly for a banking license, for the time being at least. Alibaba insiders refuted rumors that the group has submitted an application to run a private bank.

"Many companies are interested in setting up banks, mainly because they want to make loans to themselves and their suppliers. The move has a similar effect to getting listed. The only difference is that the companies will raise money by taking deposits rather than issuing shares," said Jin Gang, a former account manager at a joint-stock bank in Guangdong province.

And, of course, the high profits in the banking industry are another major attraction for companies. The four biggest State-owned banks occupied the first four positions in a list of China's 40 most profitable companies in 2013, according to a list released by Fortune China. Industrial and Commercial Bank of China was ranked first with profits of 238.53 billion yuan.

In 2012, the nation's banks realized combined post-tax profits of 1.51 trillion yuan, an increase of 20.7 percent year-on-year. Nearly 65 percent of the Chinese banking industry's income came from net interest, according to the China Banking Regulatory Commission.

The net interest margin - the difference between the interest rates for savings and loans - of Chinese banks is 3 to 3.5 percent for State-owned enterprises and local governments, approximately 10 times higher than the international rate. The margin is even wider for private enterprises, more than 7 percent, according to Larry H.P. Lang, emeritus professor of finance at the Chinese University of Hong Kong.