FINANCE: Beijing Should Accelerate Financial Services Reform

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Bottom line: Beijing should eliminate barriers that are slowing the flow of private money into lending services, in a move to offset a slowdown in lending from traditional banks that are dealing with a growing bad-loan crisis.

Obstacles hinder private lending growth

A flurry of headlines last week highlighted the recent move by private companies into China’s financial services market, led by reports that Apple (Nasdaq: AAPL) could become the first major foreign company to offer electronic payments in the country. At the same time, a chilly reception for a Hong Kong IPO by regional lender Qingdao Bank (HKEx: 3866) highlighted the difficulties many traditional Chinese banks now face due to concerns about a looming bad debt crisis.

Beijing regulators should be commended for their recent efforts to open up the financial services market to more private investment, but should consider accelerating the campaign by streamlining bureaucracy for big and well-financed domestic and foreign names like Apple and Tencent (HKEx: 700). It should also consider a similar streamlining of bureaucracy for foreign banks, many of which have left China off their global roadmaps due to stiff restrictions that make doing business difficult.
Such steps could help to offset an inevitable slowdown in lending by traditional state-run banks as they deal with their own bad debt problems, which in turn could ease the magnitude of China’s broader economic slowdown.

The opening of China’s financial services market dates back about a decade, starting with the allowance of electronic payments by private companies like Alibaba’s (NYSE: BABA) Alipay. But the campaign has accelerated in the last 2 years, as Beijing realizes that privately-backed ventures often excel over their state-run peers in providing products and services for consumers and smaller, private companies.

The country could pass a major milestone early next year if Beijing approves Apple’s plan to offer its Apple Pay electronic payments service in China. Last week media reported that Apple had signed agreements with China’s largest banks to offer the service, and was awaiting Beijing approval for a launch that would make it the first major foreign company to offer electronic payments for domestic transactions in China.

Separate headlines last week saw online search leader Baidu (Nasdaq: BIDU) also announce a new joint venture bank with traditional lender Citic Bank. (previous post) Other reports said Lufax, a leader in the emerging peer-to-peer (P2P) lending space, was eying a Hong Kong IPO next year. (English article)

Credit Suisse Milestone

Back on the international front, Swiss banking giant Credit Suisse (Zurich: CS) also marked a major milestone last week when its Credit Suisse Founder Securities became the first Sino-foreign joint venture allowed to offer stock brokerage services under revised rules from Beijing in 2007. Leading classified ad website 58.com (NYSE: WUBA) wrapped up the flurry of headlines when the company said it hoped to win licenses to offer a wide range of financial services within the next 2 years. (Chinese article)

While advances into the space are numerous, so are obstacles for many companies entering the field, especially for traditional banking services that compete most directly with state-owned lenders.

Reform advocates cheered when Beijing launched a pilot program early this year that saw a group backed by Internet giant Tencent become the first to receive a private banking license. But WeBank has struggled in its first year due to heavy restrictions that include bans on accepting deposits and opening branches, and in September its chief suddenly resigned just 9 months after the lender’s launch. (previous post)

A more traditional joint venture bank between US lender Silicon Valley Bank and Shanghai’s SPD Bank (Shanghai: 600000) has also struggled since its launch in 2012 due to a restriction that bans all such ventures from making yuan-denominated loans for their first 3 years. That restriction and others have led many foreign lenders to write off China, as few can afford to wait so long before being allowed to lend to local clients.

Meantime, Qingdao Bank was forced to scale back its fund-raising target by 10 percent last week for a $600 million Hong Kong IPO, as investors fretted about a looming bad debt crisis for Chinese banks following a government-directed lending binge after the global financial crisis of 2008. The poor response boded poorly for Bank of Jinzhou from nearby Liaoning province, which is hoping to raise nearly $1 billion from its own upcoming offer.

Rising bad debt at these state-owned banks is forcing them to raise more funds to bolster their balance sheets, and also making them more conservative about new lending. By comparison many new entrants like Tencent, Apple and Baidu have huge cash reserves and would be happy to spend them on lending and other financial services if given the chance. Beijing should take advantage of that and move more aggressively to eliminate obstacles and streamline bureaucracy, allowing these well-funded private companies to fill a void being left by increasingly conservative state-owned banks.

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