China readies for private banks

China will approve five private banks on a trial basis, the latest move in opening the previously-closed sector to private capital, according to the country's banking regulator.

The banks will be situated in Tianjin and Shanghai municipalities, and Zhejiang and Guangdong provinces, which are all located on eastern coastline and regarded as having mature financial set-ups and notable histories of opening up.

If successful, the practice will be extended to more locations, Shang Fulin, head of the China Banking Regulatory Commission (CBRC), told a press conference on the sidelines of the annual parliamentary session on Tuesday.

Previous reports said a list of 10 investors, including Internet firms Tencent and Alibaba, have been allowed by the CBRC to enter the banking sector. Both Tencent and Alibaba have finance experience.

China has recently opened the door for private investors in oil and natural gas exploration, and private banks were written into a reform package in November at a key meeting of the Communist Party of China's Central Committee.

The move was nonetheless unexpectedly rapid. Changes in core sectors, such as resources and finance, are traditionally handled with special prudence.

Lian Ping, chief economist at the Bank of Communications, expects China's mixed-ownership campaign to enter a new phase as the sector dominated by state capital opens up.

According to the CBRC, private funds in large banks nationwide only account for about 10 percent. In the case of small and medium regional banks, while over 100 have private capital shares of more than 50 percent, control remains in the grip of state capital, in terms of personnel and operations.

Two notable exceptions are Minsheng and Zheshang banks, both founded and owned by private investors.

Analysts see the pilot as a breath of fresh air in the sector that will prompt banks to play a bigger role in the real economy.

Financial services of private banks would be run independently, Shang said, in line with market demand and oriented toward small and micro businesses, as well as residential communities, often overlooked by state banking giants.

Echoing his words, Lian said private banks would be small or medium lenders, targeting small businesses. Small businesses account for over 90 percent of China's economic entities.

Allowing private capital into the banking sector is not without controversy.

There are concerns over systemic risks and an increased need for regulatory supervision, which must be very strict, according to Li Yang, a deputy to the National People's Congress and vice president of the Chinese Academy of Social Sciences.

Ying Yixun, a financial researcher, believes that small private banks will have their own risk management mechanism due to their flexible operations.

However, CBRC chief Shang stressed that private banks would be subject to the same supervision regime as existing commercial banks, with better monitoring of risk and shareholder behavior.

Each new bank will be co-sponsored by at least two private capital providers, Shang added, as a way to spread risk and preventing major shareholders from financing themselves through their banks.

Bank of Communications's Lian wants to see bank management detached from the influence of board members, with regular management reviews to guarantee independence.

Shang said private banks should bear their own losses and control their own risk, even in the case of bankruptcy.

Investor eligibility as a shareholder will be subject to further examination, Shang said, with no timetable for the launch of the banks, which will be approved when "conditions are ripe".