Guo Tianyong

 

The Bank of Nanjing and Bank of Ningbo, two Chinese city commercial banks, issued shares on the A-share market on July 19, receiving a warm response from investors.

 

The total frozen capital in online and offline subscription amounted to 1.04 trillion yuan (US$136.8 billion) for the shares of Bank of Nanjing. The subscription for shares of Bank of Ningbo froze 818.4 billion yuan (US$107.8 billion).

 

The price of their shares jumped by 75 percent and 122 percent respectively upon the market opening on the morning of July 19.

 

The warmth shown by the market toward the two city commercial banks, and to about a dozen listed banks before them, stems from investors' understanding that the banks, as a whole, are profitable in the long run and worth investing in.

 

The total net profits of the 10 listed banks in 2006 were 170 billion yuan (US$22.3 billion), achieving a 34.5 percent growth year-on-year. This is an impressive rise for any business.

 

In the IPOs, Bank of Nanjing raised a net 6.71 billion yuan (US$882.9 million) after issuing 630 million shares, or 34.3 percent of its enlarged share capital, while Bank of Ningbo raised a net 4.027 billion yuan (US$52.98 million) from the sale of 450 million A-shares, or 18 percent of its enlarged share capital.

 

Of course, the mass capital pooled by the two banks could also be attributed to excessive liquidity in the market.

 

Excessive liquidity is going to be with the Chinese economy for the long term. However, even faced with such an abundant reserve of money, a key part of the economy - small and medium-sized enterprises, are short of capital supply. And that could become a core area where the newly listed city commercial banks and their friends in other cities could fight against their bigger competitors.

 

According to a survey of 529 small and medium-sized businesses in 15 provinces and regions conducted by the Central University of Finance and Economics, 65 percent said financial institutions could not satisfy their demands. And 47 percent said they were not satisfied with the lending services of banks.

 

Small and middle-sized businesses account for up to 90 percent of all businesses, pay 60 percent of all business taxes and offer 75 percent of jobs in the country. They play a dynamic role in the country's economy. With 80 percent of small and middle-sized businesses located in counties or villages, they also play a key role in the government's effort to develop the rural areas.

 

Here is a top opportunity for city commercial banks. If they adjust their lending policy and offer a larger part of their excessive liquidity to small and middle-sized businesses, they would not only ease the thirst for capital, but also reduce liquidity.

 

It is also a responsibility of the city commercial banks to offer a lending hand to small and middle-sized businesses.

 

Concerned about the risks facing urban credit cooperatives, the central government began consolidating them into city commercial banks in the late 1990s. Hence, these banks have inherited the mission of the urban credit cooperatives: to serve small and medium-sized businesses and promote local economic development.

 

Even after going public, such a mission should not be abandoned by these banks.

 

They must also pay special attention to balancing liquidity and profitability.

 

On the one hand, they must keep a proper level of liquidity for officially required reserves and payments and on the other, they should also pump their money into multiple channels to diversify risks and improve profitability. The channels include mutual funds, insurance, bonds, gold and equity.

 

By making full use of these channels, the banks could reap good rewards from deposit accounts.

Meanwhile, they should also employ modern technology and managerial experience to refine their strategy in liquidity management.

 

As small and middle-sized businesses usually involve bigger risks and uncertainties than large companies, a risk pricing and risk control system is also indispensable for all city commercial banks.

 

The system should include risk appraisal, a database for risk information, and surveillance on outstanding loans

 

With such a well-established risk control system, city commercial banks may be able reduce their bad debts and stand firmly in the financial market against the State-owned banks, the larger shareholding commercial banks and foreign banks.

 

The author is director of the Banking Research Center under the Central University of Finance and Economics

 

(China Daily July 30, 2007)