When China opened the lowest tier of its banking sector to full private ownership in July, it may have anticipated the rush into the industry that would follow just two months later.
It’s unlikely, however, that technocrats in Beijing foresaw Chinese home appliance firms as frontrunners in the swarm.
That’s exactly what has happened. In late August, appliance retailer Suning Commerce Group said it planned to set up a private bank. A few weeks later, the government gave its approval, positioning Suning to become one of the first domestic private companies in the country to control a retail lender.
More appliance makers have followed. Gree Electric Appliance said in late September in a filing with the Shenzhen Stock Exchange that it would apply to open a bank. Midea Group, another leader in white goods, has also added its name to the list.
By one count, 27 companies, many of them well-known on the mainland, have either applied to open a private bank or intend to do so.
Trying again
Private investment in China’s banks isn’t new. In 1996, the government approved the establishment of Minsheng Bank, which was mainly controlled by private investors. Although the move was expected to usher in lighter regulation for the industry, Minsheng has remained the sole bank to operate with minimal state control.
Exactly a decade later, the government sought to attract private capital in village and town banks, the lowest tier of the country’s banking sector and, due to the small scale of the institutions, one with relatively low risk. Until now, about 70% of that market has been held by small, private shareholders. Rules ensured government control via state banks, which were required to be the largest shareholder among the smaller interests.
That model was unsuccessful in attracting significant attention from the private sector. The number of village and town banks set up since 2006 has far undershot the official target.
Market rally
July’s notice from the State Council, which promoted full private ownership in village and town banks, has generated a great deal more interest from listed firms with high market capitalization. Suning’s market value on the Shenzhen Stock Exchange is about US$9 billion. Gree is worth US$14 billion.
Suning’s jump into banking has done wonders for its stock price after a troubled first half of the year. The company reported a nearly 60% drop in first half 2013 profits compared to the same period a year earlier. Since it announced its application for a banking license on August 23, its share price has climbed from US$1.3 to a peak of US$2.15 a month later.
Gree shares took a smaller boost, climbing 9.2% a day after the announcement.
Firms in need
While the companies’ valuations may have improved, that’s not what the government set out to do when it opened the sector. In fact, the liberalization of village and town bank ownership may not have even been done to reform the banking sector. Deregulation at the bottom of China’s banking industry is not expected to spread upward to municipal banks or joint-stock banks.
Instead, the government hopes that privately controlled small banks will extend credit to small and medium enterprises (SMEs) that are overlooked by China’s bigger financial institutions.
For small firms, capital can be hard to come by. The country’s IPO market is at a standstill, private equity and venture capital funds are shrinking and state banks prefer to lend to state-backed firms with low levels of risk. SMEs have starved under these conditions. In places like Wenzhou in Zhejiang province, the tight liquidity environment for entrepreneurs has contributed to China’s swelling shadow banking sector.
Private banks, disconnected from the state behemoths, will likely be more willing to lend to small companies. Town and village banks are known for having a solid on-the-ground understanding of the business environment that will allow them to better assess risk, which they can price in accordingly.
In that sense, Beijing hardly cares what kind of firms establish private banks – as long as they feed the private sector that government-backed lenders have neglected.