In January China's banking regulator, the China Banking Regulatory Commission, issued its 'guiding opinions' on the supervision of private banks. Its new policies fall into four categories.

In line with its "Guidance on Promoting the Development of Private Banks," the China Banking Regulatory Commission (CBRC) recently issued its 'guiding opinions' on the supervision of private banks. These strive to establish a unified, co-ordinated, safe and effective regulatory system for private banks, clarifying private bankers' powers and responsibilities.

The Third Plenary Session of the 18th Central Committee of the Chinese Communist Party stated that, with the help of more onerous regulations, it is going to allow qualified private capital to invest in setting up small and medium-sized banks. In 2004, the CBRC launched pilot-projects for private banking purposes with the approval of the Chinese State Council (the cabinet). Through this mechanism, the Government approved the opening of the first five pilot private banks.

In June 2015, after the release of China's "Guidance on Promoting the Development of Private Banks," the establishment of private banks turned from a pilot project to a normal phenomenon. So far, the CBRC has approved the establishment of 17 private banks - a number that includes the original five pilot banks.

After assessing the performance of private banks, drawing on international experiences and soliciting opinions from all relevant parties, the CBRC issued the Guiding Opinions on Supervision of Private Banks. These so-called opinions revolve around two main objectives: the need to encourage private banks to develop 'scientifically' and the defence of their profits (or the "risk bottom line," as the Chinese call it). The opinions explain the supervisory requirements that private banks must satisfy and, according to the CBRC, make the regulator's supervisory work "more scientific and granular." The CBRC believes that this has enhanced the competitiveness and "risk resistance capability" of private banks and has made them more stable.

The 'guiding opinions' promote general requirements for the supervision of private banks. They attach equal importance to prudential regulation and innovative development, adhere to Chinese principles of whole-course supervision, innovative supervision and co-ordinated supervision and mix unified regulation with differentiated regulation. They impose the following requirements.

1. Help for economic development. The development of private banks should be in line with the general principle that finance ought to "serve the real economy," a rather dangerous concept in the eyes of most Western governments, which instead have supported the 'financialisation' of their economies since the 1970s or 80s. The regulator requires them to follow clear but 'differentiated' strategies - this apparently is a reference to each private bank approaching business in its own way and not copying others. It also exhorts them to "stick to featured operations," whatever those might be, and provide more pertinent and convenient financial service for medium, small and micro-sized enterprises, "rural undertakings" and community projects. They are also obliged to promote "financial inclusion," a topic that rarely concerns the high-net-worth market as it concentrates on poor, 'unbanked' customers. As China's economy is vibrant and its wealth is building up to such an extent that it is now losing industrial jobs to poorer countries, HNW investment in such projects is likely to be lucrative as well as in line with government policy.

2. The promotion of innovative development. This appears to be a re-run of the first objective. The CBRC states: "The supervisors should lay equal emphasis on encouragement and standardisation, innovation and risk prevention, strengthen supervisory service, support private banks to innovate in business, service, process and management on the premise of compliance with laws and regulations and controllable risk, pay attention to incentive compatibility of regulation policies and offer positive incentives to private banks which carry out featured operations and provide effective service of financial inclusion."

3. Stronger prudential regulation. The CBRC expects to impose specific requirements on private banks in key areas such as related transaction management, equity management and the supervision of shareholders. It also wants to increase the "self-restraint, market-restraint and regulation-restraint of banks," whatever that might mean. It is encouraging shareholders of private banks to get involved in the banks' development and to make banking as a whole more credible than it is today. It also wants banks to manage risks effectively and become more 'sustainable.'

4. The fulfilment of supervisory responsibilities. The CBRC aims to clarify "localised supervisory responsibilities," with supervisors being required to enhance joint supervision and improve the effectiveness of market access, off-site surveillance, and on-site examination. Supervisors and local governments should promote communication and the sharing of information during private banks' risk resolution processes. 'Risk resolution' occurs when teams identify and make a record of ways of avoiding threats and making the most of opportunities. They often do this by involving various departments, perhaps producing financial risk reports, human resources risk reports, IT Risk Reports, etc. Once he has collected data and ideas from all the departments, the project manager in question develops a risk resolution action plan. The identification of the most serious risks at the beginning of a project saves time and money. Supervisors are required to co-operate with the Government in establishing a co-ordination mechanism to guard against and resolve risks in a timely manner.

Next, the CBRC will supervise private banks continuously and is looking forward to mastering the territory. The CBRC will make a summary of its experiences over time, solve new problems while considering new circumstances, and improve the way it regulates on private banks continuously.