China Minsheng Banking Turns to Small-Business Loans — Strategy Puts Lender at Ground Zero as Nation Tries to Overhaul Financial System

By WILLIAM KAZER | The Wall Street Journal

A paddle boat glides through Beijing's Houhai lake district. Businesses such as the paddle-boat concession are critical for Minsheng.
A paddle boat glides through Beijing’s Houhai lake district. Businesses such as the paddle-boat concession are critical for Minsheng.

BEIJING—Xue Ming, a dairy farmer from the grasslands of Inner Mongolia, used a loan of a million yuan from China Minsheng Banking Corp. 600016.SH -0.22% to expand his business.

He added 100 cows to his herd, taking the total to 600, while the bank is getting an interest rate of 8.3%, compared with the 6.9% average for the banking sector, as it pursues a strategy that has given the lender some of the industry’s fastest growth in profits. Earnings rose 35% last year, even as China’s big four banks all posted increases of less than 20%, although Minsheng’s profit growth slowed to 20% in the first half of 2013.

Dong Wenbiao, the bank’s chairman, wants to expand the share of loans to small business from roughly a quarter of its portfolio to 45% to 50% over the next three to five years. In an interview with The Wall Street Journal, Mr. Dong said that Minsheng’s small-business loans are typically priced 30% to 40% above a benchmark rate set by China’s central bank—considerably higher than most state-owned firms are willing to pay.

His experiment, begun in 2009 when the bank launched its business for smaller and “microsize” customers, puts the bank at ground zero as China tries to overhaul its financial system. Experts and even many Chinese leaders argue that China’s banks should loosen their stranglehold on credit and make funds more available to smaller, private businesses. Such a move would be part of a broader effort to liberalize China’s inefficient financial system so it can operate more on market principles.

If Minsheng succeeds, it would be a hopeful sign for other lenders—and the financial system as a whole—as they try to adapt to the nation’s changing needs. A stumble would suggest a slowing economy and rising debt worries are hindering that shift.

Small-business people ranging from Qu Xisheng, who operates a paddle-boat concession in Beijing’s Hou Hai lake district, and Dongfang Yu, manager of a company that runs Beijing rickshaw tours, have turned to Minsheng. Mr. Qu already has borrowed and returned 1 million yuan, about $163,000, to expand his business, according to bank officials, while the rickshaw-fleet manager has obtained a 2 million yuan line of credit. “We have the bank’s approval,” said Ms. Dongfang. “We haven’t decided where to use the money.”

Investors have less faith than Minsheng in the small customers it is targeting. Borrowing of Minsheng’s Hong Kong-traded shares—a proxy for short-selling activity—has risen sharply, peaking at 21.5% in mid-July before falling to 14.4% as of Monday, according to data provider Markit. Before June, when a crunch in short-term interbank lending sent shivers through the financial system, 7% of its shares were lent to short sellers. The stock is 33% below a February closing high, although it has risen 13% since its recent closing low in early July.

The skeptics say small-business owners will be hardest hit by China’s slowing growth. They also cite Minsheng’s increasing dependence on other banks for daily cash needs—a weakness highlighted by the events in June.

“Minsheng’s risk profile is the highest among the [Hong Kong-listed] Chinese banks,” wrote Bernstein Research analysts in a note to clients last month.

Mr. Dong said the risks are overstated. “The people who say our business is risky and high-cost are terribly mistaken,” he said. “They haven’t looked at this market closely.”

Mr. Dong has little time for his critics, among them the investment banks that have taken a negative view on the bank’s stock. “My daughter wanted to go into investment banking,” he said. “I told her to get a job that served the real economy.”

Still, investors have grown increasingly worried about the bank’s rising small-business loans. At the end of 2009, loans to small businesses totaled 44.81 billion yuan, amounting to about 5% of its loan portfolio. By the end of 2012, that figure had jumped to 317.47 billion, or 23% of total loans. Mortgages, which are considered less volatile, fell to 5.2% of total loans from 11% over the same period.

The skepticism mounted when cash temporarily dried up in China’s financial system in June. Worried about excessive lending, policy makers engineered a squeeze in the interbank market, where banks lend to one another to meet their daily needs, in a signal to banks to curb excessive lending. Bernstein Research calculates that Minsheng depends on sources other than deposits for 31% of its funding, well above the level of less than 20% at China’s biggest banks in the second half of the year.

Mr. Dong called the crunch a “technical” issue that was solved by China’s central bank. He said the bank is working to increase deposits. Its efforts include installing about 10,000 community-banking stations in cities around the country over the next three to five years. Essentially souped-up automated-teller machines, the stations can take deposits, make withdrawals and offer video links to bank tellers so that customers can ask about other bank services.

The squeeze and worries about China’s slowing economy put Minsheng’s small-business emphasis under focus. Its first-quarter earnings were up 20%, a slowdown from all of 2012, although still strong compared with rivals.

Wednesday, the bank reported a solid 22.95 billion yuan in first-half net profit, up 20% from a year earlier, showing that its formula of lending to small businesses was still able to produce healthy results. But a sharp narrowing of its net-interest margin—the spread between its cost of funds and its lending rates—also suggested that it will have to run a lot faster to stay ahead of its rivals.

In its report, Bernstein Research cited limits to the size of the small-business-lending market as well as increasing competition from lenders looking for higher returns. It also criticized Minsheng’s use of cross-guarantees, a lending system common in China in which it would allow loans to be guaranteed by companies in the borrower’s supply chain or by other companies in the borrower’s same business area. It said those problems could knock Minsheng’s return on equity to 14% this year, from 25% in 2012.

Minsheng says such criticism shows a lack of familiarity with the market. Mr. Dong said nonperforming loans in the small-business arena totaled about 0.5% in the first quarter, well below the bank’s 0.76% overall nonperforming- loan ratio in the same period. Nonperforming loans overall inched up to 0.78% at the end of June. By comparison, the banking sector averaged 0.96% at the end of the second quarter, according to China’s banking regulator.

Minsheng also argues its model gives it a cushion as China moves slowly to loosen its grip on the financial sector. China recently removed a floor on lending rates and has hinted that it may ease a cap on deposit rates. In the past, the combination of controls has given big state-owned banks a healthy, guaranteed profit margin.

But with small businesses still lining up for loans priced above the benchmark, that won’t have much impact on Minsheng. “We don’t have a market-based system now. And we need to wean banks off [state] support,” Mr. Dong said. “Liberalizing interest rates is the way to make banking market-oriented.”

—Grace Zhu and Cynthia Koons contributed to this article.

Write to William Kazer at

A version of this article appeared August 29, 2013, on page C1 in the U.S. edition of The Wall Street Journal, with the headline: Chinese Bank Bets on Small Business.

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