China is in constant flux. Now, even its most powerful sector is going through a phase of unprecedented change. The transformation of the local banking sector is taking shape with the entrance of Taiwanese Sinopac to Nanjing’s banking scene and today’s announcement of a shutdown of mobile QR payment services. Recent steps by have been speaking a clear language of a government that is willing to open the previously entirely controlled banking system of China to more competition.
Thursday, the 13th of March was witness to an event of historical importance; the official opening of the first Taiwanese-owned bank on the mainland, right here in Nanjing. It is the first bank owned by a non-CPC unit and has the right to offer services not only to the corporate sector but also to individuals. It is not the first step that speaks of a hitherto unforeseen opening-up of the previously tightly controlled Chinese financial system. Only two days prior, on Tuesday, 11th March, authorities made an announcement that they planned to drop interest rate controls in the coming two years; after years of discussion and debate this has been the first official statement to set a definite time frame. The message is loud and clear: Change is coming. Better be ready.
That the government is serious about opening up interest can be seen in the steps that have already been taken; in July 2013 the floor limit for bank lending rates was lifted and five months later, in December 2013, a set of guidelines followed for the introduction of negotiable deposit certificates on the interbank market.
The announcement of the loosening on interest rate control was followed by another bold move. According to an official statement, five private banks will be approved on a trial basis; it is the first time in the history of the CPC the sector will be open to private capital.
These steps are great news for small and medium-sized enterprises (SMEs), who have traditionally been neglected in terms of loans since the banks preferred large state-owned companies as the controlled system fostered the stereotype that such payment is guaranteed as opposed to the perceived instability of smaller, individual businesses. From a cross-strait perspective, Taiwanese bank Sinopac arriving on the mainland market is yet another step by China’s “little brother” of strengthening financial ties between the two. A close link already exists due to a tendency among Chinese companies who need funding to look for such outside of the mainland after the government’s clampdown on risky lending and a December credit squeeze made the loan landscape a lot less appealing to mainland investors. According to data by Taiwan’s central bank, mainland Chinese borrowers have turned into Taiwan’s largest debtors, currently owing over ¥313 billion.
Virtual Payment Methods – Reshaping an industry?
While Taiwan’s stake in mainland cash is steadily rising, there are other players in the field. The banking boat has been rocked in recent months with the emergence of a handful of internet companies that have been tackling their way into the financial industry. Businesses such as Alibaba and Tencent have been introducing a wide range of investment and financial services, be that the immensely popular Yu’ebao, an online payment service launched by the former or Weixin’s virtual payment via QR code introduced by Tencent.
Their better interest rates (Yu’ebao offer an almost 6 percent interest rate compoared to only 3.3 maximum by traditional banks) have put them ahead in the game. Yu’ebao attracted 81 million users who deposited a total amount of about ¥500 billion in the space of nine months.
The virtual march to success of the two privately-owned IT companies has been halted as of today, 14th March, with a public demand made by China’s central bank that payments made through the scanning of a bar code; on which Tencent and Alibaba’s popularity mainly depends, will be halted due to security concerns related to their verification processes. Both companies received a notice from the People’s Bank of China (PBOC) regarding the shut down of said services.
It is yet another chapter in a story of clashes, as state-owned Union Pay, who holds the country’s monopole on providing credit cards, tried to pressure Alibaba into routing their payment service Alipay through UnionPay’s system in order to receive commission on transactions. As a result in August last year, Alipay halted its offline point of sale service for small company.
Although the temporary set-back will leave a dent in the new generation virtual banking companies’ earning, they have already got the solution; both companies announced this week that they will be applying to be part of the trial plan for privately-owned banks. The competitors also intend to each launch virtual credit cards, which allow customers to pay for purchases through their own payment arms.
It seems the banking sector is set for a tumultuous future as the authorities walk a tightrope between letting new competitors enter the market while preventing a “hostile takeover”.
