Written by Michael N T Tan.

Although the Chinese banking industry in general has posted continued strong growth in 2012, the signs are for a slowdown in 2013. City Commercial Banks (CCBs) which form one of the more important lenders to SMEs (Small Medium Enterprises) showed strong growth in bank assets of 27.7% year on year to reach US$11,442.8 billion in the 3rd quarter of 2012 but is likely to show a much reduced growth figure in 2013. This is evidenced by the projected slowdown in national economic growth of 7.6% for 2013 down from 7.8% which was down from 9.3 percent in 2011 and 10.4 percent in 2010.  At the same time NPLs (Non Performing Loans) will increase. In 2012, NPLs for CCBs increased from 0.78% of their loan base in the first quarter of 2012 to 0.85% in the 3rd quarter of 2012. Although this is a low percentage of NPLs on the whole, the danger is that it may accumulate rapidly in a weakening economy.

City Commercial Banks form the third tier of the banking industry in China and lend mostly to small and medium enterprises in the private sector. As such they are sensitive to changes in the economy and any changes in banking policies of the People’s Bank of China. Recently the PBOC tightened the money supply in the interbank money market which caused short term interest rates to rocket upwards. This caused China’s stock markets to fall to a three year low and there are fears of SMEs being negatively impacted by this latest round of credit crunch. Traditionally SMEs have relied on the shadow banking system and CCBs to fund their operations and the danger is real.

CCBs in China may be conveniently divided into those with foreign partners and those without. There are about 15 CCBs with foreign banking partners with more planned and it can be said that these CCBs with foreign partners represent the cream of the over one hundred CCBs. The China Banking Regulatory Commission (CBRC) has encouraged CCBS to seek out foreign partners as a means to modernise and upgrade while at the same time encouraging CCBs to amalgamate so as to strengthen themselves.

Out of the hundred or so CCBs, only three have thus far listed: Bank of Beijing, Bank of Nanjing and Bank of Ningbo. However another dozen or so have applied or signalled their intention to do so. Again they are mostly those CCBs with foreign partners as foreign partners are eager to have a market valuation placed on their investments. Many of these foreign partnered CCBs have implemented excellent corporate governance structures and mechanisms and this is reflected in their superior financial performance when compared to the rest of their peers. One result of this paradigm shift is that the CBRC has permitted such banks to open additional branches not only within the province of their origin but also into other provinces nationwide. In this manner these CCBs have substantially increased market share and have emerged as a credible challenge to the Join Stock Commercial Banks that form the second pillar of the banking industry in China.

Michael N T Tan is a former Australian bank executive, who will be taking up an appointment as visiting professor at the School of Business at the Yunnan University of Finance and Economics in China in September 2013.