Rules remove capital adequacy ratio requirements, limits of equity investment for financial institutions

The Chinese government is loosening its reins on private capital's entry into the banking industry to encourage more lending to small businesses, according to a draft of new rules released by the China Banking Regulatory Commission.

In a statement dated Aug 9, the commission said it has revised rules regarding administrative licenses for Chinese lenders and is seeking feedback from the public until Sept 9.

According to the rules, it has removed the capital adequacy ratio requirements and upper limits of equity investment for domestic financial institutions that will initiate the establishment of a commercial bank.

Instead, it added a requirement that the initiator must possess a good social reputation, have no record of illegal behavior and have no big issues regarding improper internal management.

Zhou Dewen, the chairman of the Wenzhou Small and Medium-sized Enterprises Development Association, said the new rules will further open the door for private capital to enter the financial field because it lowers the threshold for private companies.

He said a large proportion of private capital is in the hands of individuals instead of with an organization that has registered at an administration for industry and commerce, therefore the removal of the previous requirements would facilitate such capital to enter the banking business.

"We noticed the new rules have also added some restrictions, such as private players only using their own capital to hold banking shares, instead of purchasing shares on behalf of others. This is necessary for containing the risks of private banks," Zhou said.

The new rules also loosened the requirements for banks wanting to set up branches in China and overseas by removing the standards for banks' allocated capital for their branch operations during the application.

Lower thresholds to establish a bank in China would encourage some large financial institutions to extend their footprint in small, medium-sized and regional banking services and thus promote financial support for small businesses, said Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics.

He said the commission has also increased the capital adequacy requirements for banks' overseas institutions, to prevent overseas risks from spreading to domestic sectors.

On Monday, the State Council, China's cabinet, vowed to improve financial support to small businesses, in a statement released on its website, while the economy continues to falter and the government is curbing over-rapid credit expansion.

The development of small financial institutions will be further encouraged to improve financial services to small businesses - and the threshold at which small companies can raise funds directly on the capital markets will be lowered, it said.

"We would encourage large and medium-sized banks to develop special institutions and outlets for lending to small businesses at a faster pace and improve the scale and standardization of such lending," said the State Council.

The commission figures show that only 45 percent of the total shares of joint-stock commercial banks were in private hands at the end of 2012.

China is stepping up its efforts to get private enterprises into more businesses, said Standard & Poor's Ratings Services in a report published on Monday.

"For the third time since the Asian financial crisis, the country is in the midst of another major push to get private enterprises into more businesses," said Standard & Poor's credit analyst KimEng Tan. "If the reformers prove to be third-time lucky then strong economic growth could continue to be a key sovereign-rating support for the foreseeable future."