As Nicholas Lardy discussed in Markets Over Mao demonopolization among other reforms can help drive productivity growth in China’s service sector. Banking in China has long been monopolized by the state. However, this is beginning to change.
In July 2013, the State Council called for allowing private capital to enter the banking sector. Fast forward just over a year later, Chinese regulators have now approved establishing five new private commercial banks. In July, CBRC approved three private banks in registered in Shenzhen’s Qianhai Modern Service Zone, Tianjin, and Wenzhou. Last month, it approved two more registered in Hangzhou and the Shanghai Free Trade Zone.
The private investors entering China’s banking sector are fairly diverse, some are new to finance while others are well establish players. Small and Micro Financial Services Group – owned by Alibaba's founder Jack Ma - is the owner of Alipay and is already a leader in microlending, wealth management, and third party payment services. The firm’s new MyBank will presumably be able to leverage Alibaba’s existing base of shoppers and millions of small merchants to expand its business. Tencent – one of Alibaba’s leading competitor – is also a leader in third party payment solutions with Tenpay. Similarly they have a large pool of existing users on their highly popular WeChat platform, which is also now offering payment services. Fosun Group is leading private investor in a number of insurance ventures in China and abroad. On the other hand, JuneYao Group is relatively new to finance but not to competing against state firms. It was one of the first privately-owned companies to invest in China’s airline sector when restrictions were first lifted on private investment in 2005. Their aviation business – JuneYao Airlines - has since grown to be a leading low-cost airline.
There are still a lot of uncertainties about the success of China’s new private banks. Although firms such as Alibaba can benefit from a preexisting base of customers, other banks may struggle to compete with existing branch networks of state-controlled banks. In addition, the new private banks will still be subject to the same restrictions on deposit rates, making it more difficult to compete on margins with established state banks. Nonetheless, more private investment in banking is a sign of progress with potential benefits to Chinese consumers and productivity gains for the economy in the long run.