The Minefield Hidden in Baidu’s Soon-to-Launch Online Bank

SEOUL — Should traditional bankers pay heed to the soon-to-launch direct bank by Baidu, the Chinese Google, and its bank partner, CITIC Bank Corp.?

Yes, in the same way that seven-year-olds find cheese melting on toast fascinating.

Certainly, Baidu has the right partner in CITIC, which has around $32 billion of assets, for its direct banking venture, announced today. Baidu, meanwhile, is the fourth-most-trafficked website in the world. The idea is to create a direct bank called Baixin Bank Co., as the new venture will be called (“Baixin Bank” means something on the order of “One Hundred Letters Bank”) that leverages both. Here’s how Baidu explained its mission, roughly translated from the Chinese:

[Baixin will address] business needs, in order to further promote the financial sector in the internet business, the development of inclusive finance, [and] support the real economy.

That’s not much to go on, for sure. According to TechCrunch, Chang Zhenming, chairman of CITIC Bank, said that the initiative would “better meet the growing needs of ordinary people and small businesses for financial services, helping to create a more inclusive finance, and supporting the development of the real economy.”

Still, it is unclear what the venture will look like. It was disclosed, however, that $310 million of regulatory capital has been allocated to the venture, so it is clear it will be well-funded.

But if anyone is looking to Baidu’s bank to foment innovation, they are likely mistaken. What many Westerners don’t understand is that, despite the slick new surface of consumerism and commercialism in China, its economy remains controlled, and strictly so. The CEO of a finance company in Hong Kong told Bank Innovation today that Chinese government-owned financial ventures must still act as mandated by the government. The CEO relayed a circumstance where executives at a Chinese brokerage were arrested after they sold securities into the summer stock market declines, rather than buying more shares, as the government had mandated.

Oh, yeah, CITIC is owned by the Chinese government.

The Baixin announcement makes a point to mention that the direct bank was approved by the CITIC board “in favor, nine votes against zero; abstentions zero votes.” Further, last month CITIC announced plans to issue “virtual” credit cards in partnership with Alibaba and Tencent, the two other major internet companies in China. The cards would have allowed users to pay by scanning QR codes — but China’s central bank stopped the initiative within days.

The short of it is that the fintech sector should not expect Baixin Bank to go very far outside the lines with innovative products and services. Besides, Baixin is still subject to regulatory approval.