China's first private bank?
Just in case you haven’t read about the China private bank initiative, when we talk about private banks in this context, it doesn’t refer to private banking in terms of wealth management, but banks that are completely separate from the government and owned by private entities. In China, this is very rare – only one existing bank is completely private: Minsheng bank. The remaining banks, even the ones that are listed publically, all have at least a small percentage of ownership that still lies with the Chinese government.
Private banks in China are one of the different ways that the government is working to address the issue of shadow lending and banking without actually shutting down the practice altogether. As we have discussed in previous articles and People's Bank of China Vice Governor Hu Xiaolian mentioned at a conference recently: “banks need to seek out other financial intermediaries to relieve pressure on financing requirements.”
Essentially, despite its flaws and risks, the current informal shadow banking system is a bit of a pressure valve on the banking industry in China and helps many SMEs get the financing they need which they otherwise might not be able to get. The hope is that with the new private banks focused on SME lending, shadow lending especially in the SME segment will be replaced and supplanted with legitimate lending from the private banks themselves.
Better Risk Management & New Innovations
In addition to their segment focus, the new private banks will start with a clean slate. Rather than having to clean up their balance sheet or worry about capitalization, the new banks will be able to create a business that (hopefully) has all the proper risk management controls in place to ensure the cleanest balance sheet possible from the start.
The new private banks in China will be a bit less beholden to the central and local governments and so can be more selective in their lending practices and could potentially avoid the non-performing loan issues that other banks had faced. A decade ago, getting a loan from a bank in China was not really a question of how creditworthy you were but rather whom you knew at the bank who could help you get one. Although it’s safe to say that this practice is changing, many of today’s non-performing loans may have been given out based on personal connections and subsequently gone bad.
It’s clear that the new banks understand this as well. We have heard from many of the fintech companies that we have spoken to that they have been in regular touch with Tencent, Alibaba and the other private bank owners, so clearly there is a understanding that new and cutting edge systems will be required.
Welcomed innovation
The new private banks will likely usher in a new round of banking innovation. The idea of a tech company becoming a bank is something that is very unique for China. When I first arrived in China, I had to pay my rent by physically going to the bank, withdrawing money, walking across the street, and depositing it at my landlord’s bank. At the time, that was maybe 5 years behind western banking. Today, I pay for nearly everything using Alipay – China has gone from a system that was 5 years behind western banking to one that is 5 years ahead.
This is unlikely to change rapidly either. Although there are some examples of non-banks moving into banking like Tesco in the UK, there are few if any tech companies that have done the same ex-China. Even PayPal, one of the largest third party payment processors in the world, hasn’t focused on this.
Around the time of Alibaba’s IPO, we talked quite a bit about how its difficult to understand the impact that Alibaba has in China without being on the ground here. Ali-bank or whatever they decide to brand it will be no different – the impact on the market will be huge. Couple Ali-bank with We-bank (Tencent’s private bank) and there is a massive potential for innovation and new business models.
The biggest beneficiaries of the new private banks will likely be the Chinese customers themselves. The large tech companies are in the process of setting up as MNVOs (mobile network virtual operator) by leasing bandwidth and spectrum off of the big Chinese MNOs. We have also talked about internet finance. Alibaba has already changed the way people shop and use mobile and online payments, could they be poised to do the same for banking?