Commercial banks need to diversify business

China's commercial banks should diversify beyond traditional banking, Yi Gang, deputy governor of the People's Bank of China (PBOC), the country's central bank, said over the weekend.

"China's commercial banks have an identical business model and lack unique business features," Yi told a forum hosted by Peking University on Saturday, according to the Xinhua News Agency.

Instead of competing on better services for local residents and small and medium-sized enterprises, many city commercial banks are vying with each other in expanding their retail footprint, according to Yi, who cautioned the country's commercial banks have yet to develop specific services targeting the fields of real estate, automobile, bills or credit cards.

Banks are required to cut their reliance on traditional lending, revenues from which are declining. In 2013, all of the country's eight listed joint-stock banks saw shrinking net interest margins, a key driver of their profits, financial news portal 21cbh.com reported Friday, citing the banks' annual financial disclosures.

The opening-up of the country's financial system to allow for more private and foreign capital involvement will facilitate diversification in the banking sector, Yi said.

China is pushing forward with interest rate liberalization and meanwhile establishing a deposit insurance scheme as part of efforts to reform its financial system, according to Yi.

Increased competition with more private entities participating in the financial market will inevitably push for a diversification in the banking sector, especially given the bourgeoning Internet finance wave that has swept across the country, Yang Weixiao, a Beijing-based senior fixed income analyst at Lianxun Securities Co, told the Global Times Sunday.

Smaller banks and new private banks in the pipeline would focus on more innovative banking businesses that are riskier but can bring higher returns, while big State-owned banks, which have large customer bases and huge retailing networks, might be more cautious in opening new frontiers, Yang stressed.

As for capital flows during the first quarter when the Chinese currency was seen depreciating, the central bank's Yi, who also serves as the head of the State Administration of Foreign Exchange, said at the forum that there are no hot money outflows but instead slight capital inflows.

But Yang noted the country has actually seen signs of a sharp fall in hot money inflows due to the yuan depreciation in recent months, although funds outstanding for foreign exchanges, a gauge of short-term capital flows, remain in the positive territory.

The current phase of yuan depreciation is likely to continue, as the global liquidity supply would dwindle if the tapering of the US Federal Reserve's bond-buying program continues at its current pace, he said, adding China's ensuing currency reform will rein in speculative money inflows weighing on the yuan's value as well.

The value of the yuan will weaken against the US dollar for the whole year, although a slight yuan appreciation is expected in the second half of the year along with a pickup in the economy, E Yongjian, a financial analyst with the Bank of Communications in Shanghai, told the Global Times Sunday.