Alibaba, Tencent get nod for private banks

Ten companies, including Internet giants Alibaba and Tencent, have been picked to invest in China's first five privately owned banks, the banking regulator said yesterday.

However, the eligibility of the 10 firms, which also include Shanghai-based conglomerates Fosun Group and JuneYao Group, and China's biggest auto parts supplier Wanxiang Group, will be reviewed before they can file a formal application, said Shang Fulin, chairman of the China Banking Regulatory Commission.

The State Council, China's Cabinet, has approved the CBRC's trial program to set up the five private banks.

Each bank in the trial will have at least two originators. There's a cap on the maximum stake that each shareholder can take in the private bank, Shang said at a news conference held during the annual meeting of China's legislature in Beijing.

The first banks will be located in Shanghai, Tianjin, and the provinces of Guangdong and Zhejiang.

The new institutions will be expected to focus on lending to small- and medium-sized companies, Shang said.

He gave no timetable for when they would open or details of their size.

The regulator will make assessments of the first private-bank trial before moving to further open up the state-controlled banking sector.

The 10 private firms were selected by the CBRC as they met the prerequisites set by the regulator, including private companies bearing residual risk on their own, the so-called "living wills," and differentiated market positioning and specific strategies.

Residual risk for the banks include systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk.

Banks' "living wills" are proposed strategies for resolution in the event of insolvency or shutdown.

"The trial of privately owned banks is the highlight of the banking reforms in 2014," Lian Ping, chief economist at the Bank of Communications, said yesterday. "Properly and effectively managing risks is the key factor of the pilot program. Selecting private companies with relatively stronger financial strength will shore up the private banks' risk resistance."

"The arrangements for private investors to bear the residual risk on their own and the 'living wills' will help protect the legitimate interests of stakeholders," he added.