In another key moment for financial sector reform, the chairman of the China Banking Regulatory Commission Shang Fulin has announced that 10 private sector firms have won provisional approvals to establish banks. The international and domestic press widely applauded the move, which should accelerate the arrival of market-driven interest rates and crack open the banking sector after decades of state-directed lending.
CBRC officials told reporters from the 21CN Business Herald that they want to ‘let capital speak, let capital decide’. But they also want owners of that capital to bear the losses from their mistakes.
But where was Suning on the list of winning applicants? The Nanjing-headquartered home appliances giant didn’t appear among the 10 companies, which had been paired in alliances to form five new private sector banking groups.
Last August Suning very publicly announced its submission of a preliminary plan to set up a bank (we covered it extensively, see WiC206). It changed its name from Suning Appliances to Suning Commerce and registered the domain name suningbank.com.
All three actions had a stunning impact on the group’s share price, which rocketed 214% between June and its peak of Rmb14.33 ($2.3) in October. Since then, Suning’s shares have dropped back to about Rmb7.8, but still trade at more than 100 times estimated 2013 earnings.
According to China Securities Journal – a publication run by Xinhua – regulators never received an application from Suning to set up a bank, preliminary or otherwise. It reports that CBRC officials suspect share price manipulation and that the securities regulator, the CSRC, is also investigating.
But could it have all been a bureaucratic snarl up? A defiant Suning released a statement late last week insisting that it had sent its application documents to the State Council.
Meanwhile the 10 firms that will forge ahead have been grouped geographically in line with China’s other pilot projects and will be regulated regionally rather than centrally.
CBRC officials tell the 21CN that one of the key tasks will be to monitor related party transactions – i.e. business groups using their banks to lend to their corporate subsidiaries.
The government is also keen to ensure that the new entrants provide genuine competition to the state-owned sector, as well as open up new funding channels for liquidity-starved small and medium-sized enterprises (SMEs).
Three of the five groupings are on the commercially dominant Eastern seaboard.
In Zhejiang Province, tech giant Alibaba has been paired with China’s largest auto parts manufacturer Wanxiang. The two will focus on micro loans and deposits, taking advantage of Alibaba’s existing e-payments network Alipay, as well as its loan financing facilities for suppliers.
Also in Zhejiang, power equipment manufacturer CHINT will work with petrochemicals and plastics conglomerate Huafeng. Their business model will initially focus on Wenzhou, the industrial hotspot where the two are based.
Two of China’s most entrepreneurial conglomerates have been paired to focus on Shanghai. Fosun International, which spans steel, property and financial services, will work with the JuneYao group, which runs an airline and dairy businesses.
Further south in Guangdong, gaming and social networking group Tencent will team up with Shenzhen Baiyeyuan. They will focus on making smaller loans funded by access to the province’s larger depositors.
Finally in the north, copper producer Huabei has been aligned with Tianjin Shanghui and will concentrate on corporate lending.
What all five arrangements have in common are models which are infrastructure light (no branches) but technology heavy – using well-established customer databases for credit mapping, for example.
However, the speed at which the banking sector is being wrenched apart is creating tension, with CCTV’s influential commentator, Niu Wenxin calling Alibaba a “vampire that has climbed on the body of banks” (see WiC227). Niu and others worry that greater competition will push up funding costs for the state-owned banks, which will reduce the amount of money they can lend to the real economy, putting pressure on loan rates and their default ratios.
Sina Finance also suggests the new players may increase risk across the sector given their lack of banking experience. And if they are not closely regulated, who is to say they will stick to their proposed business plans and lend to SMEs?
“All the banks want a slice of the SOE [state-owned enterprise] cake because it is so delicious,” the portal argues. “In the future, these new private banks will want to take a bite too.”
But nearly all agree that ordinary consumers will benefit. For decades, state-directed interest rates have imposed an effective tax on savers thanks to the wide spread between lower deposit rates – which never beat inflation – and the higher interest demanded on loans. The subsequent profits enabled banks to rebuild their balance sheets after an industry-wide restructuring of failing SOEs in the 1990s and then to subsidise cheap lending to heavy industry.
Now depositors should enjoy greater choice and higher returns. Indeed, this new reality was roadtested in recent months by Alibaba’s pioneering money market fund Yu’E Bao (which means ‘leftover treasure’, and first discussed by WiC in issue 202).
The fund offers an annualised return of roughly 6% compared to 0.35% for on-demand bank deposits. There is no high minimum threshold like wealth management products and investors can fund it with as little as Rmb1 from their Alipay accounts. The average investor is just 26 years-old, according to company information.
Since its launch last June, Yu’E Bao’s funds have grown 100 times to Rmb400 billion ($65 billion). Its runaway success has forced more traditional banks to follow suit with China Merchants Bank launching ‘Better Than Gold Treasure’ earlier this year, for example.
Should China now follow the US trajectory, money market funds are likely to grow at an exponential rate from their current level of 1.9% of retail deposits. In 1974, when Fidelity launched its pioneering Daily Income Trust, only 1.5% of US retail deposits were invested in money market funds. By the end of the decade the ratio was half and by 1997, it exceeded the amount in retail deposits altogether.
But critics wonder whether Alibaba investors understand that Yu’E Bao is not a deposit but an investment, which carries risk since the principal is not guaranteed.
CBRC officials say they are well aware that banking deregulation requires new legislation to provide deposit insurance for retail investors plus a financial insolvency law to ensure more orderly wind-downs for privately-owned financial institutions that get into trouble. Hence too the signs in the Global Times that the regulator is trying to slow the headlong rush into financial services, with reports that both Alibaba and Tencent have been asked to halt plans to launch virtual credit cards on their online platforms this week. Policymakers also stress that none of the proposed new banks will be given formal licences until their plans are “mature”.
But their state-owned rivals seem to believe that the newcomers may not realise what they are getting themselves into. Says ICBC boss Jiang Jianqing, “Do you want to make big money? You can open a bank. Do you want to lose big money? You can also open a bank.”
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