China private bank push sparks speculative stock frenzy

China private bank push sparks speculative stock frenzy

Fri, Sep 27 2013

* Policymakers express support for privately-owned banks

* Speculators feast on stocks linked to private banks

* Hope that private banks can boost financing to small firms

* But officials, bankers say no panacea for SME financing woes

By Heng Xie and Gabriel Wildau

SHANGHAI, Sept 26 (Reuters) – 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 medium-sized 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 percent this month through Tuesday after the firm announced plans to establish a private bank. The stock has since corrected but is still up 42 percent.

Tencent Holdings, the Internet giant that runs the popular WeChat social networking platform, also said it has applied for a banking license as part of a consortium of firms. Its shares have risen by 13 percent in September.

But an executive at Tencent told Reuters it has 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 percent on the month.

NO PANACEA

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 percent of GDP and around 75 percent 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.

“I’m afraid that relying on private banks to solve SME financing problems is difficult to achieve.”

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 told Reuters.

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.

Bank reform enthusiasts should also remember that private capital already comprises a significant share of the current banking system, at least among smaller banks.

While the Chinese government owns at least an 80 percent share in China’s “Big 5” banks, which account for 44 percent of total banking system assets, private investors already control larger shares of other banks, data from China’s banking regulator shows.

Among mid-sized joint-stock banks and small city commercial banks – which together control 27 percent of bank assets – private investors already own 41 percent and 54 percent, respectively, of total equity. For rural financial institutions, the ratio is 90 percent.

“Financial service for small companies is a worldwide problem. All you can do is try your best to increase the channels. Establishing private banks certainly creates one additional method, but in the short term it’s impossible for this to have a truly revolutionary impact,” said the regulatory official.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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