The country's long-awaited fifth largest bank, China Postal Savings Bank (CPSB), formally opened on March 20.

Once part of the postal service, the CPSB's roots go back to early 20th century when the Kuomintang government set up an institution to manage the money sent through the post office.

After several ups and downs over the decades, the postal saving system was legally approved in 1986 and became an important part of China's postal services.

Despite filling a real need, the postal savings service had a major structural problem: It pumped money from rural areas into the financial sector by taking deposits from farmers and migrant workers. But the capital could not find its way back to rural areas because the postal savings system was not allowed to make loans in any form.

A full-function financial institution was suggested by the central bank in the 1990s as an attempt to check the outflow of money from rural areas and serve the financial needs of the rural population.

The suggestion was finally endorsed by the country's financial watchdog, China Banking Regulatory Commission, in June 2006. The relevant parties were authorized to prepare to launch the CPSB.

The bank is positioned as a supplier of financial services in both urban and rural areas with a focus on retail customers and intermediate-sized businesses. It is committed to delivering basic financial services to urban and rural communities.

This strategy will obviously assist the CPSB in becoming a major player in the rural financial market. The emphasis on supplying financial services to the countryside fits well with the competitive advantages of CPSB and the development of the banking sector.

After evolving over the past two decades, CPSB has 36,000 branches attached to the post offices, 60 percent of which are located in rural areas. Covering cities and villages, the CPSB branches are knitted into the most extensive network furnishing financial services to individuals across the country.

Individual postal savings bank books numbered 140 million when CPSB was inaugurated, making them one of the most widely used financial services.

With its current penetration, CPSB would have a natural advantage over its competitors in basic financial services like granting microcredit and transferring money between branches, especially for the rural population.

Most commercial banks in China regard cities as their major market and concentrate their resources on attracting big clients. The competition among financial institutions in cities, especially in major ones, has become white hot.

CPSB has to occupy a different market to survive with a registered capital of 20 billion yuan (US$2.56 billion). With this modest sum for a commercial bank operating across the country, CPSB would experience many limitations in financing big clients.

It is, therefore, an obvious strategy for CPSB to explore the market of individual financing.

More importantly, rural areas are poorly covered by financial outlets. Within the limited options, the financial services offered to rural customers are far from adequate or diversified enough to satisfy their needs. CPSB will find a big market with eager clients here.

Of course, CPSB should also try to tap the financial market in cities after it has accumulated extensive experience in the countryside.

As China's commercial banks began their restructuring for listing on the stock market, most cut their branches to brush up their balance sheets. Some transferred their retail outlets in counties and townships to the Rural Credit Cooperative.

As a result, the Rural Credit Cooperative became the only financial institution in many areas. The monopoly in local markets brings fat rewards to these outlets but prevents rural residents from enjoying better financial services.

The authorities have made numerous efforts to reduce the monopoly of the Rural Credit Cooperative, such as relaxing the requirements for initiating rural financial institutions and approving the establishment of village banks. But these arrangements were only carried out as pilot projects and are not yet ready to be promoted across the country.

CPSB's network of branches is similar to the Rural Credit Cooperative's, and their business modes are also parallel.

Fierce competition can be expected after CPSB opens branches in towns and villages. The competition will definitely inject dynamism into the rural financial market, improve services and raise the efficiency of financial institutions.

Admittedly, CPSB may face huge pressures in the early stages of business. The financial services in rural areas involve risks of different degrees, posing huge business uncertainties.

The CPSB decision-makers should try to consolidate its resources, improve its risk control procedures and internal supervision, and find a business mode appropriate to rural areas. These strategies will enhance its comparative advantages in rural areas, enhancing its competitiveness as a newcomer in the financial market.

The author is director of the Banking Research Center under the Central University of Finance and Economics

(China Daily March 29, 2007)