China Banking Reform: 10 Private Companies Including Alibaba And Tencent Allowed To Set Up Private Banks

China’s powerful tech giants, Alibaba Group Holding Ltd. and Tencent Holdings Ltd (HKG:0700), will likely become more powerful in the future but in a separate sector. The two companies are among the ten that were granted permission to set up private banks in China, a big step for the easing of restrictions in the banking sector, which is until now monopolized by state-owned banks.

Five banks will be set up on a trial basis in the cities of Tianjin, Shanghai and the provinces of Zhejiang and Guangdong, said Shang Fulin, head of the China Banking Regulatory Commission (CBRC) at a conference on the sidelines of the National People’s Congress, China’s annual parliamentary session. The announcement is in line with the reform package rolled out during the Third Plenum meeting in November, which vowed to open up China’s banking sector, Xinhua, China’s state news media, reported on Tuesday.

“While private banks are subject to the same regulation as other banks, they should have also their own characteristics, especially focusing on serving small and medium-sized companies,” Shang said.

Each of the banks will be co-sponsored by at least two capital providers, Shang added. Alibaba said in an emailed statement to Bloomberg that it will partner with China Wanxiang Holding Co. JuneYao Group, Fosun Group and Zhejiang Chint Electrics Co., Ltd (SHA:601877) were also among the selected ten.

Private investment currently accounts for 11 to 12 percent of the Chinese banking industry’s total capital, the rest is controlled by the state. China Minsheng Banking Corp Ltd (SHA:600016), established in Jan. 1996, was the first privately owned Chinese bank. But this new batch of banks will be completely funded by private investment, a change that will loosen government control in the banking sector, according to Bloomberg.

The private banks will need to have adequate net capital, a specific business strategy and a mechanism to prevent risks from spreading and to protect depositors’ interests, Shang said. Risk monitoring in the sector will be strengthened to prevent the banks from becoming financing tools for their shareholders.