China’s private banks have all the hallmarks of being able to break the stranglehold of the state banking sector and to fill the void for lending to small businesses but major challenges lie ahead, panellists at this year’s Boao Forum in Hainan said last Wednesday.
“It is the best time ever to set up private banks in the history of Chinese banking…They will have a very promising future,” said Zhu Tao, president of Shanghai Huarui Bank, one of just five private banks to have so far been given the green light in China
Huarui Bank officially started operations in May 2015 as the second bank in the first trial batch – part of Beijing’s pilot programme to attract more private capital to the state-dominated industry, stir up competition, and provide better financial services for consumers and small-to-medium-sized enterprises.
Before Huarui there was WeBank, a joint venture created by Chinese internet firm Tencent, which opened for business in January last year. Wenzhou Minshang Bank, Tianjin Kincheng Bank, and Alibaba-backed online lender MyBank followed later.
Another dozen could follow, subject to regulatory clearance, Shang Fulin, chairman of the China Banking Regulatory Commission, reportedly disclosed earlier this month.
Chinese SMEs have for years struggled to obtain financing from large state-owned lenders, in spite of the fact that such small-scale businesses are a key driver of economic growth and are creating the majority of new jobs in China.
But private banks are more in tune with their needs, Boao delegates heard.
“Private banks are born to fill in the gaps [left by their big state-owned peers],” Cai Esheng, former vice chairman of the CBRC, said, lamenting that they hadn't been introduced earlier.
Zhu of Huarui Bank, nonetheless, voiced a note of caution.
He said market entry is “very difficult” because private lenders face a number of major challenges, including a lack of banking talent, seeing as most experienced financiers still prefer the job security offered by traditional state-owned financial institutions.
Other hurdles include limited capital, weak brand awareness, and limited channels to access new customers, against the unhelpful backdrop of the country’s economic slowdown and interest rate liberalisation, which is squeezing bank margins.
Based on CBRC data, net profit growth at Chinese commercial banks slowed to 2.43% in the final quarter of 2015 from 19% in 2012.
China's five pioneering private banks had about Rmb80 billion ($12 billion) in total assets and deposits totaling Rmb20 billion as of the end of last year, according to Cai. That's a tiny fraction of the assets at the disposal of state-owned lenders -- Industrial and Commercial Bank of China alone had more than Rmb22 trillion in assets at the end of 2015.
That can limit a bank's options as it tries to build up its business.
As Wu Xiaoping, president of Tianjin Kincheng Bank, put it: “The first five years are all about survival. Then you can develop your own expertise.”
Differences in corporate culture are another potential issue.
“We have 200 people coming from nearly 30 financial institutions. They have different backgrounds. And this could easily create conflicts,” Wu said.
Both Zhu and Wu agreed that China's growing integration with the internet would enable private banks to explore different, innovative services without geographical and physical limitations, as well as lower the cost of attracting more customers.
“Private banks and the internet are like childhood friends who are attached to each other,” Zhu said. “No matter what size they are, private banks all have the internet element. Huarui won’t be an exception.”
Should larger, more traditional banks be worried about the new kids on the block? Not really, delegates were told; for their own good, Chinese private need to make sure they don't overreach themselves.
"Unlike big banks, small ones shouldn’t be overambitious and aim for the world-class position,” said Ma Weihua, former president of China Merchants Bank. “They should focus on the local regions and target small firms.”