Opinion
Economic Restructuring Needs More Private Banks
The Chinese Government has been supporting the development of private banks as part of its efforts to open up of the overall economy
By Zhang Ping  ·  2016-11-01  ·   Source: | NO. 44 NOVEMBER 3, 2016

Presidents of five private banks sign a document on industrial development in Shanghai on November 20, 2015 (XINHUA)

New private banks are being established, according to Shang Fulin, Chairman of the China Banking Regulatory Commission (CBRC). Speaking at an annual conference of city commercial banks held in Nanchang, Jiangxi Province, on September 22-23, Shang said that this year, the CBRC has completed feasibility studies of 14 prospective banks—three have been approved so far.

On October 12, The National Development and Reform Commission issued a policy document, requiring an accelerated approval procedures for the establishment of new private banks.

Due to various restrictions in the financial sector, private banks in China have been small in size and weak in risk management. In recent years they have also faced challenges such as the country's economic growth slowdown, interest rate liberalization and a growing trend of financial disintermediation. Fortunately, the government has been supporting the development of those banks as part of its efforts to open up of the overall economy.

Too enhance this process, new private banks devoted to inclusive finance must be approved to make up for deficiencies in traditional banking. Small and micro-sized enterprises have always been an important part of the national economy and play a critical role in boosting economic growth. However, traditional financial institutions prefer to grant credit to state-owned enterprises, local government financing platforms or large private enterprises.

Therefore, the government must not rely solely on traditional banking to serve small and micro-sized enterprises' financing needs. Private banks characterize an accessible solution to the economy's demands by providing services to ordinary people and small companies.

Most private banks offer loans at an annual interest rate of 7-8 percent. Compared to private lending whose annual interest rate can reach 19 percent, loans from private banks can be expected reduce financing costs and boost the development of small companies. This will be conducive to the stable growth of the overall economy. Also, private banks are likely to grant credit more rapidly compared to their traditional counterparts.

Furthermore, these banks' development will facilitate economic restructuring. For quite a long time, China has mainly relied on exports and investment in real estate and infrastructure to boost economic growth. However, such a model has increasingly become less effective, and in the future the country must shift toward an economy driven by private investment and consumption. Having more private banks will help promote private consumer finance and investment, which can have a positive impact on China's economic restructuring.

Private banking may also bring about a change in traditional financial institutions once the latter notices inclusive finance's potential, and may eventually become more involved in economic restructuring efforts. In the meantime, with the introduction of this new source of competition, traditional banks will pay more attention to improving their services and accelerate their development and use of new technologies. At present, private banks have marked advantages over their traditional counterparts in applying Internet-based solutions.

Private banks should explore collaborating with traditional banks to complement each other and build a new industrial chain for Internet-based finance. Traditional banks have advantages in business outlets and customer bases, while private ones are leading in terms of innovation. Under such circumstances, they are unlikely to be rivals. Instead, they will share resources and complement each other in the future.

This is an edited excerpt of an article published in Economic Information Daily

Copyedited by Bryan Michael Galvan

Comments to zhouxiaoyan@bjreview.com

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