Illustration: Chen Xia/GT

Foshan Nationstar Optoelectronics Co, a Shenzhen-listed company, announced on August 13 that it has scrapped its five-month-old plan to set up a private bank with partners in Foshan, Guangdong Province.

Nationstar said that it was reluctant to take unlimited joint responsibility for the risks involved in the venture, which include repaying depositors if the bank goes bankrupt. According to a statement, the rules for creating a private bank neither conformed to the company's management concept nor benefited its long-term development. Instead, Nationstar will continue to focus on its core businesses, such as researching and manufacturing light-emitting diode components and modules.

On the same day, the company released its financial report for the last two quarters. The report showed sales revenues jumped 32.45 percent year-on-year, and net profit increased 29.3 percent year-on-year.

Although it's only an individual case, Nationstar's decision shows the challenges facing investors interested in starting a private bank.

The public has long criticized China's banking system for being a State monopoly that hasn't done enough to support small and medium-sized enterprises (SMEs). Consequently, some experts and market participants hold high expectations for the establishment of private banks, which they hope will be better at extending loans to SMEs.

It is true that the government has been allowing more private capital into the Chinese banking industry, but regulators and private investors remain wary at every step to push forward reforms.

Currently, private investment accounts for 11 to 12 percent of the total capital in the Chinese banking industry. The rest is controlled by the State, according to a report by the Xinhua News Agency?in March, citing Yang Kaisheng, former president of?Industrial & Commercial Bank of China Ltd. The data show great potential for private capital.

But investors should also be clear about the potential risks of establishing private banks.

As many know, the banking industry is profitable, but also high risk. Without State support, the private banks have to possess adequate capital, a clear business strategy and their own risk control system.

So far, the banking regulator has given the green light to three private banks.

Because China doesn't have deposit insurance, they have all voluntarily signed "living wills" to ensure customers' interests once they go bankrupt.

Clearly, private banks will have more financial requirements, more liabilities and will be subject to stricter regulations.

Also, private banks will have to spend more to hire banking professionals as most of the investing companies don't have nearly as much expertise as their State-owned competitors.

The China Banking Regulatory Commission (CBRC), the country's banking regulator, announced in March that it had approved a pilot program to establish five private banks in Tianjin, Shanghai, Zhejiang and Guangdong provinces, which indicates the country is taking further steps to push forward economic reforms.

Also, the first batch of 10 companies was allowed to participate in the pilot program, including e-commerce giant Alibaba Group, Internet giant Tencent Holdings Ltd, JuneYao Group, Fosun Group and Chint Electrics Co.

It is notable that these companies are mostly well-performing enterprises, particularly Alibaba and Tencent.

They are more capable of dealing with operation pressure due to their strong financial support.

But for the smaller private investors, they should be more cautious before deciding to jump into private banking.

There are also supervision limitations for regulators. Currently, there is no specific law stipulating regulations for private banks, such as requirements for capital adequacy ratios and risk management. The regulator also faces the problem of improving regulations and laws supervising private banks.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn