A Chinese banking star’s advice for CBA

As Beijing pulls out all stops to boost lending to fund-starved SMEs, CBA's unconventional approach has put it in a sweet spot.

When the Commonwealth’s Bank’s board visited China recently, it didn’t even go to any of the usual megacities. Instead it went to places that few people had heard of before, such as Zhengzhou, Shijiazhuang and Jijuan.

The bank is tactically avoiding the crowded markets of Beijing, Shanghai and the eastern seaboard in favour of China’s under-banked and under-serviced regional areas. The bank has stakes in two mid-sized Chinese city-based banks.  This is an unconventional approach for Australia’s largest lender compared to its peers (Will CBA’s Maoist Chinese strategy pay off? 11 September 2014).

However, CBA’s strategy has received a resounding endorsement from one of China’s most influential bankers, Dr Ma Weihua, the former president of China Merchants Bank and the executive chairman of China Entrepreneur Club, the country’s most influential private sector business group whose members include industry captains like Jack Ma of Alibaba and Liu Chuanzhi of Lenovo.

Ma met with CBA’s chief executive Ian Narev during his recent trip to Australia as well as scores of other banking industry executives like Nicholas Moore of Macquarie Bank.  The veteran Chinese banker speaks highly of CBA’s regional China strategy.

“It is a far sighted strategy. China’s economy is undergoing structural change at the moment, with the central and western provinces developing faster than the coastal provinces,” he said, “demographic dividends have all but disappeared at the coastal provinces and advantages of investing in central and western provinces are becoming more obvious.” 

Ma says CBA’s approach is kind of strategy he adopted when he was running China Merchants Bank. “This is a differentiated service approach, while everyone is chasing after big corporates and expanding in big cities. CBA focuses on city commercial banks and rural credit unions. They want to lend to SMEs and there is a huge market in China,” he told China Spectator.

During Ma’s tenure at China Merchants Bank, he managed to turn it from a small regional bank into the sixth largest commercial bank in China. The secret of the bank’s success lies in his clear focus on serving SMEs and retail customers. By the time he left the office, China Merchants Bank had a total net capital of over RMB 200 billion, total assets of RMB 2.8 trillion and 900 branches around the world, making it one of the top 100 banks in the world.

“If they [CBA] can use their own experience and expertise to develop a strategy as well as risk management system to serve SMEs, there is huge potential,” he said.

At the moment, the Chinese SME sector is facing a funding crisis as the economy slows down.  Beijing is trying desperately to experiment with all kind of monetary as well as fiscal tools to boost lending to SMEs. One of the key reasons behind the Chinese central bank’s recent interest rate cut is to lower the cost of funding for SMEs.

Ma says the high cost of funding for SME is not just a problem for China – it’s actually a worldwide problem. Indeed, it was a topic of discussion at the recent G20 Summit (China's SMEs struggle to jump the credit hurdle 28 August 2014).

“SMEs are too dependent on banks and that is the problem. Chinese banks are very risk averse at the moment, the government, regulators, investors and management don’t want to take on additional risks now,” he told China Spectator.

Under China’s Commercial Banking Law as well as other banking regulations, loans must be secured against collateral. “SMEs don’t have a lot of collateral -- especially for fast growing companies which are light in assets,” he said.

The tough lending criteria set out under the country’s commercial banking law have not been amended for a long time. Consequently, it benefits large state-owned enterprises as well as private companies with a lot of assets.  “Banks are stuck in limbo,” he said.

However, on a more upbeat note, Ma says that despite the present difficulty of lowering the cost of funding for SMEs, the growth in lending to SMEs is still faster than the overall lending growth and the share of loans to SMEs as a proportion to total outstanding loans has also increased.

His solution for the funding crisis is for China to develop a multilayered capital market.  “We need to create an environment that allows SMEs to raise funds directly from the market,” he says, “We need to look to developing China’s venture capital, private equity as well as internet finance industries.”

In addition, he also suggests the need to lower the threshold for SMEs to get listed on stock exchanges so they can raise money directly from investors. The government also has a role to play, such as offering regulatory as well as financial reliefs to banks that lend to SMEs.

He describes the solution to resolve this issue is not a simple one but requires a systematic reengineering of the country’s capital market.  But at the time, he says banks who can grasp this opportunity will prosper, citing the example of Wells Fargo, an American banking giant that has built a nation-wide franchise based on serving the SME sector.

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