Private lenders will test the waters of financial reform

Shang Fulin (right),chairman of the China Banking Regulatory Commission,speaks at a news conference at the ongoing annual session of the National People's Congress. Wang Jing / China Daily

Help may be at hand for cash-strapped small firms as regulators approve the establishment of banks backed by entrepreneurs

For the first time in almost two decades, the nation's banking sector is set to get an infusion of private capital with the foundation of five institutions to be formed by entrepreneurs.

Regulators hope these new banks will provide more financing for cash-starved small companies and more competition for mammoth State-owned banks.

Ten private enterprises will "test the waters" in Tianjin and Shanghai, plus the provinces of Zhejiang and Guangdong, said Shang Fulin, head of the China Banking Regulatory Commission, on Tuesday.

The companies will establish five private-sector banks, Shang told a news conference on the sidelines of the 12th National People's Congress. Shang didn't release the names of the proposed banks, but he said each bank will presumably be led by two participating companies.

The licensed companies include Tencent Holdings Ltd and Alibaba Group Holding Ltd, both of which have aggressively rolled out wealth management products online, and two conglomerates - Fosun Group and Juneyao Group.

The CBRC said the chosen companies are financially sound, have strategies to differentiate their banks in the market and are capable of hedging risks.

These private banks will be the first to be formed since 1996, when China Minsheng Banking Corp was established.

Approval of the banks is a milestone in opening up a sector now dominated by State-owned institutions.

A Tencent-led bank will be established in the Qianhai experimental zone in the southern city of Shenzhen, a Tencent spokesman told China Daily via e-mail.

Shenzhen was the country's first special economic zone, established at the dawn of the era of reform and opening-up that began in the late 1970s.

"Teaming up with Shenzhen Baiyeyuan Investment Co Ltd, Tencent will leverage its existing advantages in Internet finance and launch more innovative and efficient financial services for customers," Tencent said in a statement.

Tencent's interest in private banking may tie into its Tenpay online payment system, which allows digital transactions for its popular mobile chat app WeChat.

Competitor Alibaba, which runs the country's largest e-commerce site, applied for a license via its affiliated Small and Micro Financial Services Group, which includes online payment unit Alipay and its shareholding in Alibaba's Zhongan Insurance and Tianhong Asset Management Co.

"We joined with China Wanxiang Holding Co Ltd to make the application. We are making preparations and have no further information to share at this stage," the company replied in response to a query from China Daily.

Wanxiang belongs to China's biggest vehicle parts manufacturer, the Wanxiang Group. Alibaba and Wanxiang are both based in Hangzhou.

The Internet may topple businesses that naturally include finance, said Robin Li, chief executive officer of search engine Baidu Inc.

Baidu also applied for a license, but it didn't make the cut this time.

"What Baidu does at the moment is market financial products. This is just a more convenient way of selling currently available financial products to an audience," Li, who is a political adviser, told reporters onthe sidelines of the ongoing sessions of the top legislators and political advisers in Beijing.

Premier Li Keqiang expressed government support for online finance during his opening remarks at the congress and vowed to improve the mechanism for coordinating financial oversight.

Wang Junjin, chairman of the Shanghai-based Juneyao Group, also confirmed that his company had submitted an application to form a private bank. Juneyao's businesses include food, high technology and aviation.

You Xiaoping, chairman of chemical materials provider Huafeng Group, said that in its submitted plan for a license, Nan Cunhui, chairman of Chint Group Corp (which makes electrical and energy equipment), is the main sponsor with about a 20 percent share, while You and other local tycoons will take a smaller share.

"We want to play a role in China's financial reform and address the capital access problem for private firms. But what difference can we make? Now I'm not too optimistic, because the super-high profit era for banks is over. Banks now have to rely on careful management to profit," You said.

He said the new bank will concentrate on regional business before it expands nationwide. But technological advances may erase the distinction between regional and national banks.

Lyu Weiguo, general manager of the Wenzhou Mer-chants Joint Investment Center, was "a bit disappointed" to learn that the center's joint application for a private bank license had failed.

In tandem with another 11 Wenzhou-based chambers of commerce, Lyu submitted a first draft in June 2012 and a second one in June 2013 to the city's financial office, expressing a willingness to help SMEs struggling with funding.

"Our proposal was turned down, probably because we lack a solid capital base to cope with risks in the operation of a privately owned bank, compared with those approved enterprises," Lyu told China Daily.

Lyu and his associates plan to apply again, assuming more detailed policies are issued that target specific categories of borrower, such as smaller businesses in the city of Wenzhou.

At least one-third of China's SMEs need medium-and long-term loans to upgrade equipment or invest in new products, according to a survey conducted under the auspices of the State Council, the nation's cabinet, in 2013.

The push for private banks may raise hopes that they could help channel more financing to productive but cash-starved private companies, which provide a majority of the country's jobs, said Li Lihui, a former bank official and a national legislator.

"We haven't approved any privately run banks in 18 years, since China Minsheng Banking Corp in 1996. This year will see some major breakthroughs, "he said.

LiYang, vice-president of the Chinese Academy of Social Sciences, warned that the government should take further steps to head off banking risks, including strict supervision to protect the interests of customers.

There's no simple answer to the problem of SME financing, said Sun Lijian, director of the Financial Research Center at Fudan University in Shanghai.

"Small-cap banks may face higher financing costs than bigger ones, which implies there's a difficulty in granting low-interest loans to SMEs.

"In the worst-case scenario, the bad loan ratio is likely to rise, which may hurt smaller banks in the longer term," he noted.