China shuts down illegal private lender

Regulator orders Qiantang Bank to be closed

China's banking regulator announced Saturday that it has clamped down on an illegal private bank, which was established without authorization from the regulator, a move following a wave of applications to set up private banks since July 2013.

The Qiantang Bank, launched by an individual named Jiang Xiaqian together with Zhejiang Ruizhi Kaichuang Culture Investment Ltd in Hangzhou, capital of East China's Zhejiang Province, without approval from the China Banking Regulatory Commission (CBRC), was illegal, and must be closed down, according to a statement released by CBRC on its website on Friday.

Since August 2013, Jiang and the company have carried out a series of illegal activities including having seals stating "Qiantang Bank," "Qiantang Bank Preparatory Committee," and "Zhejiang Qiantang Bank Preparatory Committee" carved, and recruiting shareholders, said the banking regulator.

According to China's banking rules and laws, no institutions or individuals are allowed to set up banking institutions or take part in activities in the banking sector without approval from regulators.

The launch of the illegal Qiantang Bank indicated that there is a large demand for loans, especially those from small and micro-sized enterprises, in China, Du Xiaoshan, an expert of microfinance research and practice in China, told the Global Times Saturday.

"Chinese institutions and wealthy businessmen are motivated to set up private banks due to big profit margins and a large demand for loans," said Du.

In China, only around 10 percent of small and micro-sized enterprises have their borrowing demands fully satisfied by large commercial banks, according to Du.

Motivated by the profit margin, some institutions and individuals began "casting greedy eyes at this sector without legal approvals," Du noted.

The Beijing News newspaper reported Saturday that Jiang Xiaqian was involved in a dispute involving private lending in the past.

Jiang, backed by guarantees from Zhejiang Ruizhi Kaichuang Culture Investment, borrowed 1 million yuan ($163,000) from an individual named Zhu Yuejuan on July 14, 2011, but she didn't repay Zhu on time. Zhu sued Jiang in November 2013, and Jiang was ordered by the court to repay 1 million yuan and related interest to Zhu, the newspaper reported.

To financially support poorly funded domestic entrepreneurs, who are major contributors to the country's economy and job market, China decided to allow the launch of private banks one year ago.

The State Council, China's cabinet, announced in July 2013 it would allow the establishment of privately funded banks run independently from the government.

In March, Shang Fulin, chairman of the CBRC, said at a press conference on the sidelines of the annual parliamentary session that China will allow five private banks to be set up on a trial basis before the practice is extended to more places, according to the Xinhua News Agency.

After around one year's preparation since the announcement by the cabinet, the establishment of three private banks - Webank founded by Internet company Tencent Holdings, a bank in Wenzhou by Chint Group and Huafon Group, and a bank in Tianjin co-founded by Huabei Group and Maigou (Tianjin) Group - were approved by the regulator, Xinhua reported in July, quoting Shang as saying.

"Entrepreneurs in Wenzhou look forward to the private banks for financing," Zhou Dewen, president of the Wenzhou Council for the Promotion of Small and Medium-sized Enterprises, told the Global Times in a previous interview.

Wenzhou, East China's Zhejiang Province, has long been known for semi-legal or illicit private financing.

More private firms, such as home appliance maker Midea Group, were reported to have applied to set up private banks since the end of 2013, according to media reports.

Regarding the enthusiasm for launching private banks, Du warned about the potential risk of illegal activities and suggested that the regulator closely monitor the sector.

China will set up an insurance system for all bank deposits in the country to protect the interest of depositors, Chinese Premier Li Keqiang said at a meeting in Beijing Friday.

Li also noted that China will push forward reforms in the financial sector including allowing diversified capital to participate fairly in the financial market.