Suning bets bank

Established in 1906 in Shanghai, Sin Chun was China’s first privately-owned banking institution.

It was opened at a time when foreign banks exercised total control over imperial China’s international remittances and foreign trade. They also dominated loans to qianzhuang – the smaller money brokers that dealt in China’s many different currency denominations.

Sin Chun targeted the unbanked. Small businesses and any individual with “one silver dollar coin or more” were welcomed. Business grew quickly: the bank’s deposit base expanded to more than seven million silver dollars in a couple of years. With the blessing of the Qing government, Sin Chun was even allowed to issue its own banknotes carrying the portrait of Zaizhen, a prince who advocated breaking the monopoly of the foreign lenders.

But Sin Chun paid the price for being too revolutionary. Some of its key shareholders were republicans said to have helped to fund the overthrow of the Qing Dynasty. Ironically, the demise of imperial China also doomed Sin Chun. Carrying an imperial imprint, Sin Chun’s bank notes lost their credibility after Emperor Puyi abdicated in 1912. Depositors also fled to more established rivals. Even members of the royal family were said to have abandoned Sin Chun, transferring at least a million silver taels to HSBC’s former Shanghai unit.

Sin Chun eventually collapsed in 1913.

Now, a century on, China looks set to repeat the Sin Chun experiment. Last month, the State Council unveiled the latest round of plans encouraging more privately-owned banks to emerge. The goal: to support cash-strapped small and medium-sized enterprises (SMEs). And coincidentally, just as the original qianzhuang were off-shoots of shops, the first firm to announce its own plans to launch a bank is Suning, the home appliance retailer.

But how to define a private bank?

China’s banks were nationalised in 1956. Since then the most significant move to create a ‘new’ bank was the 1996 founding of Minsheng. Given that it was essentially founded and funded by private-sector entrepreneurs, Minsheng was considered by many as a new type of bank in a system still dominated by state ownership. But although Minsheng was the first lender in which the state wasn’t the biggest stakeholder, state firms still owned a chunk of its equity. And while most of its 59 founding shareholders were private capitalists, the government retained the final say on who would get Minsheng’s top jobs.

Likewise, when it was founded in 2004, the China Zheshang Bank was 85%-owned by non-government entities, the highest share of any Chinese bank. But the state-run entities who owned the remainder retained the right to appoint all of Zheshang’s senior management.

According to Minsheng’s late chairman Jing Shuping, a private bank should be defined as one “without higher authorities meddling with daily operations”. In an interview with CCTV in 2001 Jing added: “The shareholders’ meeting must be the highest organ of power.”

Using this strict definition – zero government ownership – means there isn’t a single private bank in China, reckons Yang Jihuang, author of Non-Governmental Banking: China’s Alternative Financial Modernisation.

Why are private banks now suddenly welcome?

Yang’s calculation, of course, doesn’t factor in more than 6,000 microcredit firms. These have flourished over the past decade by lending to SMEs deprived of bank loans from state lenders.

As WiC has reported extensively, this tangled network of underground credit has resulted in frequent crises, when chains of local funding implode due to borrower defaults. For selected examples see WiC124 for our report on Wenzhou’s financial difficulties; WiC160 for why 600 Zhejiang businesses had to petition for financial aid; and most recently WiC204 for our coverage of Shenmu’s cash crunch.

According to Joe Zhang, who has spent time running a microcredit firm (and recently authored Inside China’s Shadow Banking: The Next Subprime Crisis?) the rapid growth of this kind of lender is “a result of financial repression, while it meets genuine and legitimate needs and wants”.

By giving the green light to private banks, regulators are coming to terms with this reality – that banks need to do more to attract customers back from the shadows of underground banking. Just like the plans to legalise Wenzhou’s underground lenders last year (see WiC145), the suggestion is that new rules which allow private banks to develop will help to encourage this.

No more talk, finally some action?

Criticism of the large state banks has been evident for some time. One of the most vocal attacks came from Wen Jiabao, at the time Premier, who said that state-run lenders were making too much profit, too easily. He called for private capital to break up their monopoly position.

Recommendations that banking should be opened up to more competition have been a recurring theme. For example, Yang calculates that there have been more than 200 academic papers and 10,000 media reports on the topic since 1999. But the 10-point directive unveiled by the State Council early last month was the first time that the cabinet had actually mentioned the term “private bank” in black-and-white, the Beijing News noted.

“There will be one or two truly private banks born within this year,” the International Finance News then predicted. The paper, which is run by the People’s Daily, reckons that the approval of a private bank licence would be the most symbolic gesture yet of any intent to crack the state lenders’ monopoly.

Such a reform also has the backing of many local officials. The Shanghai municipal government was quick to follow the State Council, issuing its own 42-point guideline detailing how the city is ready to embrace private banks. The Shanghai Daily said the planned free trade zone (see WiC202) would be the ideal testing ground.

Officials at Shenzhen’s Qianhai special economic zone also fancy their chances of hosting the country’s first private bank too. Plus Shandong province, now governed by former securities regulator Guo Shuqing, has outlined financial reforms specifically linked to introducing private banks. That leads the Hong Kong Economic Times to believe that investors could see the first batch of private bank approvals timed to coincide with the third plenary session of the Communist Party’s Central Committee. Xinhua has said that this key meeting will be held in November.

So who wants to become bankers?

Suning’s name is prominent, albeit because of what initially seems to have been an erroneous media report.

In the latest list of approved trademarks published last week, reporters found the name “Sunan Bank Co. Ltd” had been registered. That soon led to rumours that Suning was applying for a banking licence. The share price of the company – which has been trying to reinvent itself as an e-commerce giant – climbed more than 8% in Shenzhen.

Suning subsequently clarified that it is planning for a “Suning Bank” but that the initiative is not related to the “Sunan Bank” trademark. CBN then reported that the trademark was registered by the Jiangsu-based retailer Hongdou Group, which is yet to confirm whether it too is planning a banking off-shoot.

In fact, Entrepreneurs’ Daily reports that at least eight private sector entities plan to venture into banking. It turns out that many of the candidates are retailers. Pre-existing customer bases and recognisable brands make chains like Suning excellent candidates to make the move. There are examples elsewhere that suggest it can work. For example, UK supermarket giant Tesco has been running its own Tesco Bank since 1997.

And don’t forget Alibaba…

State-run retail conglomerate China Resources already has its own banking unit in Zhuhai, while we have reported before that oil major CNPC has opened Kunlun Bank. But many see the biggest threat to the traditional banking sector as coming from China’s biggest e-commerce group, Alibaba. Regular WiC readers will be familiar with the ambitions of Alibaba’s founder, Jack Ma, in this regard. He threw down the gauntlet as early as 2004, when Alibaba developed online payment system Alipay to help consumers buy its products via the internet. Alibaba also started a micro-finance service called Ali-Loan, partnering with smaller banks to provide loans to small businesses (see WiC13).

Regulators have generally looked positively at Ma’s innovations – at least, on recent evidence. Last month, Alibaba announced that it has partnered with a local brokerage to sell asset-backed securities packaged from Ali-Loan lending (which topped Rmb100 billion over the past three years, see WiC202). The plan won approval from China’s banking watchdog, which typically bans microcredit firms from securitising their loan books.

That move will boost Alibaba’s financial business, freeing up liquidity for Ali-Loan to grow its lending portfolio. Microcredit veteran Joe Zhang even likens the plan’s significance to Margaret Thatcher’s Big Bang in the late 1980s, in which she deregulated the British banking system. He describes Alibaba Finance as “China’s future”.

Ma will certainly pose a major threat to the current banks online, thanks to the scale of his internet shopping business and the data that helps him assess borrower creditworthiness. But in terms of bricks-and-mortar retail, the banks may see more of a challenge to their deposit base from the likes of Suning, which has a retail presence in 300 cities.

Last year Suning changed its name to Suning Commerce from Suning Appliance, hinting at the widening of its commercial scope. The rebranding was part of a broader effort to reinvent the group. Suning now has almost 1,400 shops and generated close to Rmb100 billion ($16.3 billion) in revenue last year. But its goal is to grow that to Rmb300 billion by 2020, primarily by investing heavily in its online shopping plaform.

Suning’s existing relationships with its suppliers and clients, together with a workforce of more than a 100,000 staff, already provide a solid base for a banking operation, says the 21CN Business Herald. Suning’s merchandising connections with suppliers also mean that it should have a handle on the credit profiles of thousands of potential corporate clients. This could give Suning a further edge in lending to the segments of the economy that the government now most wants to support: the private sector. “Suning’s bloodline as a pure private enterprise also means it has a bigger chance of obtaining a private bank licence,” Sina Technology said.

Suning seems to think so too. According to the company, there are already 500 employees working in its ‘finance’ division and the planning for obtaining a private bank licence has been underway for five years.

What’s next for Chinese banking?

If private banks are allowed, the next logical step would be to allow them to set their own interest rates, to lure savings away from the big four lenders. That would require a fuller liberalising of deposit rates but before that can occur, most analysts believe a deposit insurance scheme is required to safeguard savers. The People’s Bank of China said in June that it is ready to set up just such a scheme and the South China Morning Post predicts it could be in place later this year.

This will reduce concerns that depositor money could disappear from poorly-run newcomers, although the regulator can also be expected to vet applicants for new bank licences exhaustively. Other controls may also be introduced: the Guangming Daily believes that the regulator should prevent any single entity from owning controlling stakes in a private bank, in the belief that a fragmented shareholding structure will ensure stronger financial support and better corporate governance.

State lenders still account for more than 90% of China’s financial assets. Such dominance won’t disappear overnight. But the introduction of greater competition will also force the state lenders to provide a better standard of financial services, said China Entrepreneur.

“The good old days of state banks’ monopoly profits are numbered,” the magazine prophecised.

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