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Tencent leads new wave of private, online Chinese banks

General Views Of Website As Tencent Holdings Ltd. Agrees To Buy 15% StakeGeneral Views Of Website As Tencent Holdings Ltd. Agrees To Buy 15% Stake

China’s stock market may have opened 2015 with a roar, the wild rally in Shanghai continuing with a stunning 3.6% rise Monday.

But away from the noise of financial markets, something that has the potential to be far more important is happening: the private sector is starting to open banks, opening vital new channels of finance to companies across the world’s second-largest economy.

WeBank, an online-only bank backed by internet giant Tencent Holdings Ltd (TCEHY), opened for business over the holiday, the first of six new projects approved by Chinese banking regulators.

The authorities hope that new, privately-owned banks will play a big role in broadening the role of market forces in the Communist-ruled economy–the central policy pledge at the 12th National People’s Congress that installed Xi Jinping as president and Li Keqiang as premier in 2013. That’s more important than ever to sustaining economic growth as China’s traditional model, based on large-scale manufacturing exports, runs out of steam.

In a sign of how much importance Beijing attaches to the new banks, Li himself attended WeBank’s opening ceremony in Shenzhen, according to the official news agency Xinhua.

So far, China’s official banking sector has been dominated by big state-owned lenders who lend most to inefficient state-owned enterprises. They keep lending rates down by virtue of a state-controlled cap on deposit rates (albeit one that was relaxed at the end of last year in an effort to prop up the banks).

By contrast, smaller and more dynamic companies are often forced to look for funds in a vast but weakly regulated ‘shadow banking’ sector, where savers can get higher returns but have little protection.

Lending to small and medium-sized businesses is under particular threat at the moment as the big banks struggle with a rise in bad loans that is crimping their ability to extend new credit.

With the arrival of the new generation of lenders, the face of the banking sector is set to change radically this year. In addition to Tencent, which owns 30% of WeBank, Alibaba Group (BABA) has also gained approval for an online bank together with the Hong Kong-listed conglomerate Fosun International.

Tencent and Alibaba have both used their online presence in the past to sell ‘shadow-banking’ products like money-market funds. Both will now be able to offer depositors the greater safety afforded by the country’s new deposit insurance scheme, making them more able to compete for deposits with government-backed giants such as ICBC and Bank of China.

Regulators said at the end of last year that all deposits up to 500,000 yuan ($81,000) would be fully insured.

With a start-up capital of only 3 billion yuan ($490 million), WeBank isn’t likely to pose an existential threat to the state banks overnight. However, banking across the globe is increasingly migrating to mobile and online platforms–a format where the new, internet-driven entrants have a clear competitive advantage both in technology and in business culture.

Ultimately, that could weaken the country’s state-owned banks, especially smaller local and regional ones with high exposure to real estate or inefficient mining operations. Dealing with that kind of problem will be a major test of Beijing’s commitment to the free market.