When talking about the works in 2019, the Chinese Central Economic Work Conference held in the end of 2018 proposed "to deepen the reform of the financial system with the focus on the adjustment and optimization of the financial system, develop private and community banks, and promote the business of urban and rural commercial banks, and rural credit cooperatives, so as to gradually returning to the original purpose. This is to re-emphasize the development of small and medium-sized banks as an important link in the reform of the financial system, and to resolve the issue of the current currency transmission mechanism, which is to provide perfect banking system to serve different real economies and establish a financial "drip irrigation" system to solve the financing difficulties of SMEs.

It can also be seen that the Chinese banking supervisory departments have also provided window guidance to some banks, demanding that they "moderately control" the net profit growth rate. At the same time, they also require some city commercial and rural commercial banks to reduce the interest rate of small and micro enterprises, and the interest for the loans at the end of the fourth quarter must be lower than the end of the third quarter. The regulatory documents pointed out that the central bank branches require financial institutions within their jurisdiction to attach great importance to the financial services of small and micro enterprises, to ensure the progress of work, and ensure that the amount of loans to small and micro enterprises increases during the year, and that the number of small and micro enterprises loans should also increase, while the cost of small and micro enterprises to be moderately reduced, together with effective control of small and micro enterprise loan risks. The intention of supervision is obvious. First, it is intended to encourage banks to increase their provision and fully expose risks; second, it allows banks to benefit private enterprises, thereby spread tightening.

From the perspective of the central government's intentions and supervision direction, the issue of promoting the return of small and medium-sized banks to the original purpose to solve the problem of difficulty and the high cost of financing for private enterprises, and small and micro enterprises. This will be the main thought for the future financial system reform and the development of the private economy, as well as to promote urban and rural commercial banks, and rural credit cooperatives returning to the lending operations and local businesses to support the local economic development. Such thought is clear from the policy, and it is also what has been advocated by Anbound to resolve the issue of the poor currency transmission mechanism. However, the solution to the problem is promoting the return of small and medium-sized banks to their original purpose. How then, should this be done?

Anbound once raised the issue of the survival and development of small and medium-sized banks, which would require intensive cultivation to return to their original purpose. The future development of small and medium-sized banks needs to intensively work on their regional and concentrated advantages, returning to the original purpose in order to achieve healthy growth and to be rooted locally. In the context of the current economic slowdown and the difficulty of financing for SMEs, small and medium-sized banks should play their own characteristics and formulate financial solutions that suit the needs of customers. They will play a role in helping SME customers to integrate investment and form differentiated competitive advantages to obtain their own market space.

At the same time, returning to the original purpose, small and medium banks must let the market mechanism play its role. Looking from the angles of risks, small and medium-sized banks should be operated to obtain a certain degree of risk-reward, so that such banks can compete with large banks and form a differentiated competitive landscape in the financial market. To solve the problem of difficulty in the loan, there can be guiding loan resource release; but to solve the problem of costly loaning, market means should be adopted. Some people in the banking industry also believe that because many banks are exploring the small and microenterprise market, in order to cover the talent, material and energy costs, it is naturally necessary to make up the risk by slightly increasing the cost.

Of course, in terms of supervision, the construction of the market environment should be well-conducted, and illegal operations should be eliminated to encourage small and medium-sized banks to take root. In the current environment, the main focus is to promote "non-standard transfer" to reduce off-balance sheet assets and make banks changing towards transparency and openness, as well as reduce policy arbitrage and regulatory arbitrage. At present, small and medium-sized banks such as urban and rural commercial banks are pursuing large-scale and cross-regional experience mainly relying on inter-bank, wealth management, bills, and other services, and some non-standard businesses have broken through geographical restrictions, forming blind competition and blind expansion. Hence, promoting their gradual returning to the original purpose would require regulatory constraints to return to the lending business and local business to support the local real economy.

The development and long-term survival of small and medium-sized banks also require market-oriented cooperation and mergers between banks. The long-term development of small and medium-sized banks is still to resolve the problem of scale, which helps to reduce costs and resist risks and also aids in the market clearing. However, due to the differentiated business between regions, the merger between small and medium-sized banks is difficult, and it is difficult to play their respective advantages. The network and interoperability can be formed through the cooperation of business and capital. In addition, large banks can also develop multi-level financial services by acquiring localized small and medium-sized banks to form banking groups. These two methods are not contradictory to the long-term development of small and medium-sized banks. Such cooperation is not integration, but the complementarity and collaboration of differentiated advantages. Internationally, many international banks such as HSBC are also localized through the acquisition of small and medium-sized banks. The key is to maintain the characteristics and capabilities of their different banks in order to exert synergies and scale advantages.

In addition, to promote the return of small and medium-sized banks to the original purpose, the Central Economic Work Conference once again proposed the development of private banks, and further optimized the competitive landscape of small and medium-sized banks through the establishment and development of private banks to enrich the participation of financial markets. There are currently 17 private banks across China, but overall the development has not achieved the expected results. Private banks' access and supervision policies are still cautious, and the development of private banks is subject to more restrictions. Regulatory aspects should also be adjusted and improved. Not only should they be encouraged in terms of market access, but the participation and innovation of private banks should also be encouraged in terms of business models and products.

Final Analysis Conclusion:

To return the small and medium-sized banking businesses to their original purpose, it is necessary to develop small and medium-sized banks like how the encouragement for the development of small and medium-sized enterprises is done. This should be done with patient, and it is necessary to change the concept of development so that such development can take root and cultivate the market.