Chinese banks finally open up to private capital

China’s decelerating economy has compelled China’s banks to accept private investments to generate funds for lending to small and medium enterprises.

China now grants private capital the same entry standards to the banking industry as other capital. The China Banking Regulatory Commission said private companies can buy into banks through private stock placements, new share subscriptions, equity transfers and mergers and acquisitions.

Private investment will also be welcomed in trust, financial leasing and auto-financing companies.

And to stimulate private investors' willingness to lend to rural residents and small enterprises, the CBRC guideline also lowered the minimum shareholding of the main initiator for rural banks (usually state-owned commercial banks) from 20% to 15%.

CBRC said banking regulatory branches at different levels are obliged to improve transparency of the banking market access constantly. Hence, they cannot impose separate restrictions or additional conditions for private capital to enter the banking sector.

Guo Tianyong, director of the Research Center of the Chinese Banking Industry at Central University of Finance and Economics, said he was very pleased to see the government encouraging private capital to invest in the banking sector.

“The threshold of the financial industry certainly should be higher due to risk concern, but there should be clear and transparent access standards that could be applied to all kinds of investors. Otherwise, private capital would always be blocked or bounced back by an unseen 'glass door'," he said.

To boost lending to the private sector, China should allow private capital to play a bigger role in financial institutions, and encourage private lending companies with good operating conditions to transfer into commercial banks which could also take in deposits.