ACFIC Calls for Allowing Foreign Capital to Invest in China’s Private Banks

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China’s leading non-governmental chamber of commerce has called for the regulators to provide fairer treatment to private banks via the loosening of restrictions on shareholders and fund-raising methods.

Chinese authorities have given their approval to the establishment of 19 private banks, of which 18 have already commenced operation.

The All-China Federation of Industry and Commerce (ACFIC) has nonetheless submitted a bill at China’s 2020 Two Sessions congressional meeting stating that the pace of growth in China’s private banks has fallen far short of industry expectations, and that they require “fair treatment.”

According to its research private banks are still hindered by a number of “invisible” barriers, such as restrictions on shareholder ownership levels and fund-raising methods.

“This restrictions were a definite necessity during the initial period of development of private banks, but China’s financial sector has seen growth in bi-directional financial opening until the present, and has reached the point where adjustments must be made in tandem with changes,” said the bill.

ACFIC points out that under current regulations the shareholders in privately operated banks must satisfy the “three purity” requirements of being “purely domestic invested, purely private, and purely onshore.”

While not formally enshrined in writing these restrictions are usually applied by regulators in practice, and are considered to be a major brake on the equity structure and development opportunities for private banks.

Although some private bank shareholders have sought overseas financing or listing, they nonetheless remain enterprises controlled by domestic investors, and thus still satisfy the “three purity” requirements.

According to ACFIC this restriction makes it difficult for private Chinese banks to raise capital, or bring experienced foreign shareholders on board.

The ACFIC bill said that against a background of “bi-directional opening of the financial sector, a discriminatory policy directed at private banks does not appear to be in keeping with the times.”

ACFIC has also called for the removal of restrictions on the percentage of equity that single major shareholders and their affiliates can hold in private Chinese banks, which it believes warps rational profit allocation.

The “China Banking Regulatory Commission Guidance Opinions on Private Bank Regulation” (中国银监会关于民营银行监管的指导意见) promulgated in 2016 stipulates that private shareholders use their own assets to bear the risk of dud loans for private banks.

This means that private lenders such as MyBank commit that capital contributed be used to undertake “residual risk that banking operations fail.”

According to ACFIC bill this provision means that private investors must bear extra duties beyond those that state-owned or foreign-invested shareholders do not bear.

“When the main shareholders in private banks bear heightened liability, they can only hold 30% of equity, and are unable to fully enjoy the dividends of bank growth, which is detrimental to shareholders continuing to invest resources, as well as detrimental to the establishment of healthy corporate governance systems by private banks.”

Private banks in China are also subject to restrictions on their regular fund-raising operations, which makes it difficult and expensive for them to raise capital.

It is difficult for private banks to raise money via the issuance of tier-2 capital bonds, or via asset securitisation operations on the interbank market, as they are classified as “innovative operations” and require special approval from regulators.

These operations are nonetheless considered just “standard business” for other types of commercial banks in China, which means private banks are only left with lending operations to drive growth.

In order to remedy these issues ACFIC has made three recommendations:

  1. Loosening of shareholder restrictions for private banks, and allowing foreign investors to invest in the equity of private banks, in keeping with the “trend of opening of the financial sector to the outside.”
  2. Giving equal treatment to private shareholders and loosening restrictions in share ownership ratios, with reference to policies for foreign institutional investment in Chinese financial institutions.
  3. Rational loosening of operational restrictions, to expand financing channels and funding sources for private banks. Provide support to private banks in direct financing, issuing of tier-2 capital bonds and other means to shore up their capital. Explore interbank asset securitisation trials for private banks, accelerate asset turnover, reduce liquidity risk and optimise private bank balance sheets.

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