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Cover Stories Series 2014> Government Debt Controllable> Archive
UPDATED: October 14, 2013 NO. 42, OCTOBER 17, 2013
The New Comer
With the go-ahead from the government, private banks can't wait to seize a place at the table
By Deng Yaqing

Special role

In an article published in Qiushi magazine on September 16, China's central bank governor Zhou Xiaochuan mentioned the importance of financial innovation and Internet finance. He also wrote that private banks should be geared to increase lending to small and medium-sized enterprises and expand financial services in rural areas.

The view was echoed by Zhou Dewen, Chairman of the Wenzhou Small and Medium-Sized Enterprises Development Association, who argued that China has no shortage of large national banks. Private banks should be directed to better serve the financing needs of local small businesses rather than pursue large-scale expansion without any focus.

Zuo Xiaolei, chief economist with Beijing-based China Galaxy Securities Co. Ltd., believed the promotion of private banks was a reflection of market equity, showing that private capital can do what government capital has been doing. But she stressed that the government is relying on private banks to solve financing problems faced by small businesses and that expectations may be too unrealistic, at least in the short term.

"High hopes have been placed on private banks," noted Tian Huang, Marketing Director of Shenzhen Kingdee Software. At the macroeconomic level, private banks can severely put a dent in the monopoly of state-owned commercial enterprises and improve financing efficiency. At the microeconomic level, they are expected to alleviate the financing constraints faced by small private enterprises in cities and rural areas, where private village banks are gaining momentum.

Supervision and insurance

Since China does not have a deposit insurance system in place, state credit has provided an implicit guarantee for state-owned commercial banks. That is to say, if these banks fail, the government would swoop in to bail them out.

Yet, authorities have not made clear how private banks should bear any risks themselves. Without the establishment of deposit insurance and bankruptcy systems, private banks cannot enter the banking industry on a large scale.

"Compared with Western countries, China is accustomed to strictly controlling financial market access. The threshold for private capital should be lowered, but supervision and risk control need to be strengthened so that the interests of all parties concerned can be secured," said Wang.

What risks would private banks probably suffer? At a seminar held by China Society for Finance and Banking in August, Guo said there are three kinds of risks at play. "First, private entrepreneurs don't know the ropes. Second, private banks may engage in connected transactions, which may lead to unfair competition. Last, bank owners may run off with the money if banks collapse."

"Only when necessary policies and systems are implemented, can private banks be shielded from operation risks," said Guo.

On the other side, with e-commerce and Internet companies flocking to the banking industry, the supervision of Internet finance is of prime importance. At the 2013 China Financial Innovation Forum, Wu Xiaoling, Deputy Director of the Financial and Economic Affairs Committee of the National People's Congress, suggested setting up a two-layer regulatory framework for Internet finance. She argued that financial activities involving public funds should be supervised by the People's Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission, while financial intermediary services and activities that are concerned with just a few investors should be supervised by local authorities.

"When private banks actually enter the market, it's very expensive and difficult for them to set up offline banks independently," said Wu. "So Internet-based banking is an inevitable step."

Email us at: dengyaqing@bjreview.com

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