At a high-profile symposium recently held in Beijing on private banks, financial think tanks put forward various ideas for the five trial private banks so they could likely get clearance from the regulator to open.
However, many of the concepts were disappointing as they did not answer some of the most critical questions.
What is the role of private banks in China's banking sector? How are new financial risks avoided as the state-dominated industry accepts private newcomers? These questions need to be fully thought through on the eve of private capital's accession to the Chinese banking industry.
At the symposium, some economists took for granted that given private firms' prominent performances in many sectors, private banks would be more flexible and competitive than state or foreign-funded banks.
Such a viewpoint does not ring true.
Despite their admirable successes in the country over the past two decades, many private companies have internal problems such tax evasion and being controlled by a single family. Private banks may also strike similar problems.
As ownership and management are clearly divided in modern corporations, it is not reasonable to judge a bank merely by its ownership.
The operation of all banks -- state-owned or private -- are in strict accordance with corporate law, banking law and other regulations.
Banks owned or controlled by the state can also be competitive if they have sound governance structures and market-oriented operational mechanisms.
In fact, it is difficult to tell whether a bank is purely a "state" or "private" entity nowadays because many banks have plural ownership structures with both state and private capital.
The point of private capital's entry to the sector is not in the so-called competitiveness of private banks. Rather, it is a sign that the banking industry is ready to open equally to all kinds of capital, state or private, domestic or foreign.
No special favors
A lot of people hope private banks will naturally boost the growth of private businesses. Sadly, that may simply not be the case.
Some economists and entrepreneurs would use piles of statistics to prove the rapid growth of the private sector and its remarkable contribution to the economy.
And very likely they would come up with a specious suggestion: For further growth of the private sector, private banks are needed to serve fund-hungry private firms.
Like state-owned banks, which do not merely serve state companies, it is not realistic to want private banks to specifically serve private firms.
Admittedly, state banks sometimes tend to favor powerful state-owned or foreign clients while leaving small private firms out in the cold. Even if a private firm has credit as good as state-owned companies, it may get discriminatory treatment.
However, creating private banks to particularly serve private firms does not help improve the lopsided banking service - it makes the industry more askew.
To eliminate discrimination in the banking service, it is more important to untangle the complex relations between banks, enterprises and government agencies.
Ideally, both state-owned and private banks should serve different clients according to their credit situation, regardless of the difference of ownership.
Be patient
Most of the private bank formulae discussed at the symposium were very ambitious.
Some were even pushing for the creation of "the Citibank of the East" within three to five years.
Such a big vision, if not a pipe dream, at least shows many are not clear about the goal and the core competitiveness of private banks.
Commercial banks are not highly profitable. Their profit margins are lower than many lucrative industries.
The uniqueness of banks is that they can control astronomical amounts of money that may be dozens of times superior to their own capital. This brings great opportunities as well as huge risks.
A successful bank must have a complete management structure and steady development strategy. Quickly expanding banks often have to pay a price for a lack of steadiness.
At a time when the creation of private banks is still only on paper, their planners' sensible longing for quick expansion is a worry.
Generally speaking, private banks have little competitive edge in terms of capital size, management and experience. It is very dangerous to pursue overnight success under such circumstances.
Private bankers should find and focus on their real strong point: Grass-roots banking services.
As major state-owned banks withdraw from rural banking services and foreign banks focus on prosperous coastal metropolises, private banks will have plenty of opportunities in rural areas and small townships.
It is not an illusion that a private bank can grow to become a powerful financial conglomerate, but it is likely to be a long journey full of fierce competition.
Good entrepreneurs equal good bankers?
The involvement of successful private enterprises with private banks cannot help the banks win trust from watchdogs and depositors.
What is more, their motion of participation is questionable.
It is easier for a successful private enterprise, which has already earned a reputation for profitability and management, to get financial support from state-owned banks and to list on the stock markets in Shenzhen, Shanghai and Hong Kong.
There is little necessity for them to enter the banking industry, in particular, to be a shareholder of a private bank.
Two objectives exist: Diversification of operations and the collection of money.
But for a successful private company, it is widely accepted by foreign and state-owned banks. Why do they need to be a shareholder of a private bank with high risks?
Then, collecting more money through private banks, which should be guarded against, becomes the only objective.
The creation of private banks is also a challenge for private companies and supervisors.
Stories from Russia, Taiwan and Indonesia prove that private banks can create large financial crisis.
As a result, private companies should create a convincing mechanism to control risks before they want to set up private banks.
They also need to persuade depositors that they can protect them.
State-owned banks can insure benefits of depositors through government credit.
If private banks can offer more interest coupled with compulsory insurance for deposits, they can allure depositors to their banks.
A well-mapped plan is much more needed than a desire for haste.
(China Daily August 10, 2003)
