THE ANNOUNCEMENT EARLIER this week of a pilot programme to establish three to five private banks this year is a tiny first step towards providing competition to China’s giant state-owned banks and easier access to mainstream banking services for small businesses. Don’t forget that many of China’s 3,000 banks are already majority privately owned but they collectively account for just 11% of the banking sector, underlining the embedded advantage the big state-owned banks derive from their national branch networks and the immense deposit bases those provide, as well as from their political connections and implicit state guarantees.
The pilot scheme is another piece in the mosaic of financial reform that is itself part of the grander design for rebalancing China’e economy. It starts to fulfill one of the pledges made at last November’s Third Plenum policy meeting, though the qualification requirements to establish one of these new banks remain unclear. But broadly what will make them different from existing private banks is that they are intended to be entirely privately financed, and would “bear their own risks” — no de facto policy role nor implicit state safety net.
Another way to further open up the financial sector, increase competition, and provide small businesses with an alternative source of finance to the shadow banking system would be to make it easier for foreign banks to enter or expand in the industry. The state’s banking overseer, the China Banking Regulatory Commission, is looking at that but it wants to let some home-grown “trusties” to get established first.
That could include restructuring some existing state owned local and regional banks under new private ownership. A range of non-financial sector players have expressed interest in getting into banking since the possibility was floated last year. Among them are Wang Jianlin, chairman of Dalian Wanda, one of China’s biggest property developers. Others include another developer, Macrolink Real Estate, retailers Shanxi Baiyuan and Suning, which already has millions of customers using its online payments system and a network of 1,700 stores, and Internet giant Tencent.