Private Banks See Detailed Rules

After Chinas central eco- nomic working conference， the roadmap of the reform to the banking industry in 2014 was drawn out as well. Among them， the detailed policy thinking about setting up private banks and the prevention and control of local debts have become the two main tasks.

On December 16， the China Banking Regulatory Commission （CBRC） held a conference in which it proposed that the reform to banking industry should be deepened to make the banking industry more open， optimize the banking governance system， promote the modernization of the regulation， prevent and solve the banking risks and improve the financial services.

The CBRC stated the goals of promoting the policy-oriented reform to the financial institutions and studying into the setup of new type of financial institutions. Previously， the central economic working conference got a document named “Several Decisions of the CPC Central Commission about the Promotion of Reform” also included the goals of “promoting the policyoriented reform to the financial institutions” and “studying into the setup of financial institutions for urban infra- structure and residencies”.

The new types of financial institution of course included the private banks， which have drawn a lot of attention from the public.

When Will Private Banks Come Out

“The detailed policy thinking about the setup of private banks aims to promote the establishment of small banks， consumer finance companies， financial leasing company and other financial institutions by private capital，” said the CBRC when it expressed the will to further enhance the reform to the banking industry.

This means that the detailed rules about the setup of private banks might come out in the year of 2014. In June 2013， the State Council said in a conference that it encouraged private capital to get into the financial industry， after which various local authorities received the applications of setting up private banks. However， waiting for the detailed rules， the examination and the final approval seem to be all the things the private investors can do after submitting the applications of setting up private banks. Presently， the details concerning the private banks such as the threshold of establishment， the management position， the cross-region operation， the differentiated regulation and who are the regulators need to be decided by the CBRC.

“The approvals of the applications of setting up private banks are expected to be given out in groups. It is meaningless to have one or two private banks established at the start，” said Lian Ping， chief economist of Bank of Communications. In his opinion， it is better to open the permit the setup of private banks before the issuance of deposit insurance system.endprint

The private investors enthusiasm in setting up private banks is mostly based on the reason of “high profitability”. In addition， some private entrepreneurs want to get into the financial industry to provide support for their industrial chain development. However， the incoming market-oriented interest is going to make the survival of banks a tough thing.

“There are several misunderstandings about the setup of private banks. The first one is the aim of earning a lot of money. The good days are gone as is the time of highly profitable banks，”said Ma Weihua， former president of China Merchant Bank and the current board chairman of Hong Kong Wing Lung Bank. The market-oriented interest rate， once implemented， means that the reduction of the gap between interest rates of deposit and credit. It is unlikely for banks to make a fortune through the large gap between interest rates of deposit and credit. At least the banks should change the operating styles and get rid of the reliance on loans. It should have other financial businesses.

Lian Ping also put forward his concerns about two aspects of private banks. On one hand， the promotion of market-oriented interest rate will press private banks ability to attract the deposits in the current market situation. Neither will they have high enough pricing ability. On the other hand， the establishment of the deposit insurance system in the future will lead to the move of deposits， bringing great impact to small banks.

“The problems come out at the very beginning. Therefore the banks must thing of some good ways or patterns to enable them to survive and thrive in the situation of market-oriented interest rate，” said Ma Weihua. In the conference of the CBRC， the present experts also suggested optimizing the categorization of the banking industry， promoting the differentiated development and the featured operation.

Although the outlook of the private banks is not that bright， the necessity for the private capital to get into the financial industry cannot be denied. Yang Kaisheng， former president of the Industrial and Commercial Bank of China （ICBC）， said the state-owned banks – ICBC included – have big sizes. The private capital could only account for 10.68% of the total capital of the 3000 banks in China. For an industry that should be open， such a proportion is too low. In addition， the increasing number of private banks might add life force to the banking market of China.

Keep the Platform Loan Balance at Baysendprint

Then central economic working conference also listed the control and solution the local governments debts as the main task. The data from the Stat Bureau of Audit showed that 80% of the local governments debts are bank ing loans. This means that the banks ar facing great stress in that matter.

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For this， the CBRC emphasized：“As required by the central government to control the local governments debts， it is necessary to further improve the identification， classification and management of risks of local governmentsdebts to ensure that the platform loan balance will not increase and the structure will be optimized to guarantee the sources of repayment.”

Lian Ping said that the growth of local governments debts might be lowered when the State Bureau of Audit made the third time of checking in the year of 2014. He forecasted that the current amount of local governments debts might be around 18 trillion yuan and the banking loans might amount to 10 trillion. The risks are rather concentrated.

Actually， to decrease the loan balance of local platforms was the requirement of the CBRC for the banking industry in 2013， but the local governments enthusiasm investment was not diminished in the first half of 2013.

As revealed by Shang Fulin， chairman of the CBRC， the platform loan balance had amounted to 9.7 trillion yuan by the end of June 2013， 400 billion yuan more than that at the end of 2012. Even though the growth rate was slowed down， the stress of newly-added loans still lingered for the banks.

“The platform loans of banks are mostly good assets and have a low ratio of bad loans. Therefore， the general risk for banks is not too big， but we should be warned against the fast increase of non-credit loans，” said Lian Ping. If local governments raise funds through trust， the cost is high and the process is opaque， thus the risk is hard to be controlled.

Prior to that， Shang Fulin also reminded people of the decrease in the growth of platform loans for local governments fundraising and the increase in the non-credit fundraising. When the total volume of local governmentsdebts goes up， there might be the risks of low utilization rate of capital and the insufficient repayment ability.

Lian Ping said that to deal with the risks of local governments debts needs a）， to improve the transparency of local governments debt， and b）， to control the growth of local governments debts. New addition in the loan balance in the banking platform is one thing. And the channels of local governmentsfundraising must be standardized. For example， the issuance of governmental bonds can improve the transparency of local debts.

As for the risk regulation， the CBRC required the banks to focus on the prevention and control of the risks of fluidity， real estate credit， shadow bank and information technologies.endprint