Private potential

By Li Qiaoyi Source:Global Times Published: 2013-10-9 0:08:01

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New blood is set to flow into China's banking sector, with a number of large companies recently unveiling plans to take advantage of government efforts to encourage private capital to enter the industry.

China's new leadership has pledged to open up the country's financial services sector to private investment as part of a broad set of deepened reform initiatives, and a recent surge in the shares of retail giant Suning Commerce Group Co has been seen as an indicator of bullish investor sentiment toward the plan.

As of Tuesday, shares in Suning, headquartered in Nanjing, East China's Jiangsu Province, had soared by 62 percent since it released a statement on August 23 saying it had filed plans with relevant government departments to set up a privately owned bank.

The announcement on September 12 of the approval of the corporate name of Suning's proposed bank unit - Suning Bank Co - by the State Administration for Industry and Commerce (SAIC) gave a further boost to market sentiment.

The SAIC has also approved the corporate names of several other private banking entities, including Sunan Bank, backed by the Hodo Group, a private company based in Wuxi, Jiangsu Province. Huarui Bank Co, reportedly backed by Ruian Huafon Small-sum Loan Co, a microcredit company in Wenzhou, East China's Zhejiang Province, was also approved.

By September 26, 27 listed companies or major shareholders of the companies had submitted plans to set up bank units or revealed plans to make the application, the China National Radio website reported Tuesday. The number will keep growing, said the report.

Internet giant Tencent Holdings is also eyeing the banking sector. The company said it is a member of an investment consortium applying for a license to set up a private bank, according to a Reuters report on September 23.

Riding the tide

Zhou Dewen, president of the Wenzhou Council for the Promotion of Small and Medium-sized Enterprises, expressed his optimism about the potential of private banking.

"We've heard calls urging the approval of private bank licenses for a decade, and it should be time by now for the government to give the green light," Zhou told the Global Times Monday.

The approval of one or two private banks is expected before year-end at the earliest, Zhou said.

China International Capital Corporation said in a report released in mid-September that the market share of private banks is likely to reach 5-10 percent in five years, which will increase competition in the banking industry.

By the end of July 2013, the assets of large State-owned commercial banks had risen by 8.8 percent year-on-year to 60.22 trillion yuan ($9.81 trillion), accounting for 42.9 percent of the total assets of the bank sector, according to the latest official data.

Smaller joint-stock commercial banks saw their assets increase by 22.1 percent year-on-year by the end of July to 25.6 trillion yuan, representing 18.2 percent of the total, while city commercial banks witnessed 18.4 percent growth in their assets to account for 9.6 percent of the total.

In the latest sign of government support for private banks, Zhou Xiaochuan, governor of the central bank, wrote in an article on September 16 that controls on market access will be loosened in order to foster the establishment of more private banks.

Private banks will be well-positioned for the small and micro-sized segment of the financial market, Zhou said in the article, which was published in Qiushi Journal.

Zhou called for further efforts to move forward with the establishment of a deposit insurance system, as it could help to create a fair competitive environment for both large and small financial institutions.

Gold mine or risk?

Despite the promising recent signs, the market outlook for private banks remains fraught with risk, at least for the time being.

"For those aiming to dip a toe into the [private banking] sector, it will be quite risky if they haven't enough ammunition," said Jin Lin, a senior banking analyst with Orient Securities in Shanghai.

The size of a bank's assets and its ability to offer innovative services and woo depositors will be of key significance, he said.

The China Banking Regulatory Commission (CBRC), the country's banking regulator, said at a work conference at the end of July that private financial institutions will have to operate at their own risk, following the guidance issued on July 5 by the State Council, which for the first time mentioned the private bank pilot program.

Even Zhou Dewen, a longtime advocate of the program, cautioned against a runaway private bank phenomenon.

"Regional private banks that are oriented toward small and micro-sized enterprises should be encouraged, but large ones aiming for nationwide networking would involve more risks," he said.

In an interview with the Global Times on September 30, Qin Huichun, a former deputy head of the central bank's branch in Wujiang, Jiangsu Province and CEO of China Commercial Credit Inc, a Wujiang-based microcredit company, said the country's legal framework has yet to be fully prepared for the opening of private banks, pointing to the lack of policy details as a key impediment.

The policy details will be worked out through joint efforts by a number of government bodies including the central bank and the CBRC, but no announcement is likely within the next year, according to Qin.

After the policy details are put in place, it will still take three to five years for private banks to become mature, he said, noting that microcredit companies will be able to remain competitive as they face less of a regulatory burden than banks.

Qin's company floated on the NASDAQ in August, the first non-Internet firm in China to do so in nearly two years.

Qin said a more pragmatic intermediate solution might be to foster the financial service offerings by e-commerce firms, before approving their deposit services.

But Zhou Dewen, who has called for prudence in selecting the candidates for the pilot program, holds a different view.

"E-commerce companies won't be seen in the first batch of companies selected for the program, as Internet financial services are something new, adding more uncertainty," he said.

Qin said his company's future will hinge on the development of Internet financial services, a move that he believes can offer substantial growth for the company.

"If the time is right, we may even consider transformation into a banking business," he said.

Posted in: Insight

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