Specific China plan still in discussion phase, says official

Signs that China is preparing to open its banking sector to privately-owned lenders has raised hopes that they can help ease financing difficulties afflicting smaller firms.

A handful of listed companies have also seen their stock prices soar in recent weeks on rumours they are planning moves into banking. But bankers and policymakers say that hopes for private banks have been inflated.

At least in the short term, private banks will provide neither big new profits to listed companies nor an easy solution to small and mediumsized enterprises’ (SMEs) financing woes.

“Of course this is the general policy direction, but the gap between hype and actual progress is really too huge,” said a regulatory official, who asked not to be identified because he was not authorised to comment on policy. “The bank regulator’s specific plan is still in the discussion phase. This rush of public attention isn’t necessarily a good thing.”

Shares in Suning Commerce Group, a large electronics retailer, had risen by 65% this month through Tuesday after the firm announced plans to establish a private bank. The stock has since corrected but is still up 42%.

Tencent Holdings, the Internet giant that runs the popular WeChat social networking platform, also said it had applied for a banking licence as part of a consortium of firms.

Its shares have risen by 13% in September. But an executive at Tencent said it had no plans to establish a bank on its own. “As far as I know, establishing a bank really isn’t a main element in Tencent’s development plans in the financial domain,” he said.

Chinese punters in recent weeks have also speculated wildly on smaller-cap stocks based purely on rumours, including Beijing Centergate Technologies and Jiangsu Hongdou Industries, which is up 44% on the month.

Beyond the speculative frenzy, the push for private banks has also raised hopes that they could help channel more financing to China’s productive but cash-starved private firms.

Economists have long decried the tendency of China’s state-dominated banking system to grant loans primarily to large state-owned firms, even as SMEs account for 60% of GDP and around 75% of new jobs.

But banks and officials warn that even if regulators move aggressively to permit new, privately-owned banks, it won’t provide an immediate solution to SME financing. “Small and medium-sized banks themselves face higher financing costs than big banks. This means they can’t possibly offer low-interest loans to SMEs,” said a senior executive at a large, state-owned bank.

The case of Minsheng Bank, a privately-owned lender founded in 1996 and known for its focus on SMEs, is instructive. “When Minsheng Bank was established, we said we wanted to serve private enterprises and SMEs. But once we started to do it, we found that the bad loan rate was very high. We didn’t dare to keep going. We had to reverse course and start ‘dating a rich guy’,” a Minsheng board director said.

Only after the bank developed a foundation of reliable, low-risk borrowers did it begin to wade back into SME lending.

“Cultivating and operating a bank requires a long-term mentality. Requiring a bank to effectively service SMEs in the short term – one shouldn’t be so idealistic,” the director said. – Bloomberg