“I think the biggest competitors are non-bank institutions”

April 2015

Li Zhenxi, chairman, Baoshang Bank, discusses strength in the small and micro business communities, competing internationally and solving the profitability problem for small banks.

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Here is the transcript of the video

Ties to micro and small businesses

Emmanuel Daniel (ED): You have a reputation for having a very strong ties with the small business and micro business communities. So you are not just a banker, you are actually the patron of the small business community in the areas you’re active in. As the Chinese leadership talks about the slowing economy, what do you see as being the most important priority for the small business community in China today?

Li Zhenxi (LZ): That is a very interesting question. The problem presents more intensely at the macro levels and also to the bank itself with the slowing economy. These two years we have engaged with McKinsey consulting with good results. The impact of the slowing economy does not affect us too deeply in terms of NPL which was 0.42% in the past and about 1% last year. However, we have the capability to resolve this problem in terms of quality management and a provision rate of about 200%, and we haven’t had to use this method yet. Overall, we face three major problems; interest rate marketisation, deposit system for insurance, as well as Internet banking. From the Internet perspective, it affects greatly the SME and retail businesses. However, we have a solution already which will be implemented this year.

ED:The real need of small businesses is the ability to grow. The answers you’re giving me is from a banker’s perspective, but if I was the business owner, there will come a time when I don’t want to depend on a bank. I would want to depend on the market and list my company on the stock exchange. I would also want to have other forms of funding and partnership arrangements with other players in the market place. Tell me a little bit about your activities outside of banking that demonstrates that you understand the full financial needs of small businesses in China today.

LZ: We have studied Chinese SMEs from 2005 till now and our past experience on SME research has been published into two textbooks for postgraduate study in two Chinese universities; Central University of Finance and Economics and Capital University of Economics and Business. We have conducted systematic and thorough studies on the sector. The scope of SMEs in China is not very clearly defined. Baoshang Bank defines loans of Rmb 500,000 ($80,000) and below as micro business while international standards define loans of less than Rmb 50,000 (8,000) as micro business. The current range that we look at is between Rmb 500,000 to Rmb 5 million ($800,000) as small business. In terms of the technology we use, it is German-based APC technology and employs got two methods.

One is cash flow analysis which looks at the customer’s ability to pay. The other is cross-examination to understand customers’ real intention to pay and the capacity for genuine involvement. In terms of SMEs, the collecting level and the trust level is very high because of Chinese culture. The family element is very strong and loyalty to the family is high. Saving is important in group culture. SMEs generally spend the money they have rather than spend what they might be earning tomorrow. To them, when the people invest in fixed assets such as a home or land, they do it with a thought for future generations and will not do anything to sacrifice these.

Risk profile of customer base

ED: The answers that you are giving focus a lot on relationships. A Western person looking at your bank will say that it’s very difficult to assess a large number of customers just based on relationships. A big problem as you know in China, is that you can’t trust the data, you only can trust the person. What is your sense of how much of this is considered professionalism in banking and how much of this is people relationships?

LZ: As you can see, I can’t speak English. But after introduction via a project by the World Bank and China Development Bank, I grew to understand the system and service ideas of Western financial institutions. In the past we intended to find large loans like other big banks, however afterwards we realized who our customers are. In the past we didn’t approve loans even with collateral or guarantees, but now we do the opposite. With use of German technology, we give them loans even without any guarantees and efficiency is very high; three days turnaround time. Now Alibaba is faster. What matters are the measures taken and the technology employed.

We have mature micro business skills and risk is under control and our culture has transformed. So who to trust depends on skills and views of the customers. Many competitors are learning from us and we are successful in customer assessment in terms of good technology and a culture of recognition. Baoshang Bank is ranked in the first tier in risk management, and I acted as the rotating chairman of the reputation risk management committee of the China Banking Association, which demonstrates the recognition by regulators.

ED: Is Minsheng bank or Bank of Beijing one of your competitors? Who are your competitors?

LZ: The last time I answered this question, I said we had no competitors. I am not saying no competitors are there in the banking industry, but I believe that when we truly research and implement in such a detailed area with great effort, we will always have the advantage over others.

ED: But in that space, the real problem is the risk of customer. In other words, the competition goes to highly risky customers.

LZ: I think we need to be clear about where we should go and understand how we get there. I don’t have to head in the same direction as everybody else. I think the biggest competitors are non-bank institutions, such as funds and Internet finance companies. These have a big impact on us.

Competing on an international level

ED: You travel a lot outside of China and I actually encountered Baoshang Bank at international meetings, SIBOS and so on. What are your plans in terms of internationalising the name of Baoshang Bank?

LZ: Baoshang Bank aspires to be a modern international bank. In the past, we intended to learn from international institutions actively but now we have started to cooperate and learn on a regional scale and through partnerships. We cannot stop learning, either in terms of industry knowledge or on social practices. Recently, Baoshang Bank has done well and I have also won many honours in China. Our corporate vision is to realise value, create beauty and work hard in pursuit for excellence.

ED: I’ve spoken with Dong Wenbiao of China Minsheng Bank who is driving the Asia Financial Cooperative Association initiative and I find that banks very active members in it primarily have two goals. One is to be highly networked within the Chinese banking system. There is kind of networking taking place in China where banks of your size are able to connect with other banks of the same size and create the power that can overcome that of larger banks in the country. I think there is also an intention to build this kind of networking outside China. Why are you taking this approach instead of raising more capital and becoming a larger player yourself?

LZ: We don’t exclude the possibility of cooperation in the future. Last year I wrote two books. One is “Trade and Peace”, which aimed to solve the profitability problem for SMEs and help them improve themselves through trade. The other book was “Power of Finance”. Most people don’t pay enough attention to finance, but finance is the most effective tool to allocate resources. China has a large market where enterprises have complementary relationships rather than competitive ones. For example, inside our association, there are banks, insurances, trusts, funds, and leasing companies, which is a relatively loose connection but we hope to connect and cooperate closer in the future.

ED: Why aren’t you listing Baoshang Bank?

LZ: We are considering transformation and have enough capital. However, going public in China is difficult and there is a long waiting list. If we list the bank in Hong Kong, the share price may not be as favourable, so for now, we concentrate on the business.

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