Will
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Establishing Corporate Governance Will be Impossible
If They Remain Under State
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Control (2004.8.31)
by Chi Hung KWAN
http://www.rieti.go.jp/en/china/04083101.html
In order to make listing
a reality, the banks must shore up their capital bases and resolve the problem
of the non-performing loans they have amassed. The government injected 270 billion
yuan into the four major banks in 1998. The following
year, it purchased some 1.4 trillion yuan worth of
non-performing loans from the four banks at book value and transferred them to
four newly established asset management companies. Furthermore, at the end of
2003 authorities pumped $45 billion in foreign reserves into the capital bases
of the Bank of China and the China Construction Bank. Thanks to such measures,
the ratio of non-performing loans to total lending at the four major banks has
fallen from more than 25% in the end of the 1990s to 15.6% as of June 2004.
However, it would be too
early to conclude that the non-performing loan problem has been resolved.
Without eradicating the reason behind the creation of non-performing loans -
the lack of corporate governance at the banks and the state-owned enterprises
that are their mainslow borrowers - no matter how
much public fund is pumped into banks, it cannot catch up with the growth of
new bad loans. If the authorities start to help banks without much thought, it
would aggravate moral hazard and non-performing loans would increase
uncontrollably. What is more, as the Chinese economy moves from overheating to
an adjustment phase and the businesses of borrower firms down, it is feared that banks' non-performing loans will further increase. In
addition, in order to go public in overseas markets, the banks will have to
undergo assessments in line with international standards, which are more
stringent than domestic rules, and there is a good possibility that the amount
of non-performing loans they shoulder will be larger than that reported in
their self-assessments.
In moving toward listing,
Chinese authorities have drawn up a three-step strategy to reform the four
major banks. In the first stage, the banks are to strengthen internal
management and risk management so as to become modern financial institutions
that have comparatively strong international competitiveness. This would be
followed by the second stage, in which they would be transformed from being
100% state-owned to joint-stock banks with the government as the major
shareholder, and in the final stage these joint-stock banks would be listed on
overseas equity markets. As a step symbolizing the transition toward the second
stage, on Aug. 26 the Bank of China was relaunched as
"Bank of China Limited". However, it is doubtful whether the bank had
actually achieved the first-stage target, and even if it rushes to move to the
second phase, it will have to clear many more hurdles before it can go public.
As a matter of fact, in the Aug. 26 news conference, Bank of
In order for
"management quality to meet the standards for listed firms," banks
must have the ability to achieve the rate of return expected by investors - in
the words of Beijing University Professor Lin Yifu, they must be
"viable." At present, the four major banks are all straddled with a
huge number of employees and a mountain of non-performing loans. Despite
repeated non-performing loan disposal and capital infusions using public fund,
their revenues per employee and return on assets are both still very low. The
weakness of their operations becomes clear when they are compared with the
world's top banks, which are becoming strong competitors even within
The essential reason why
managerial efficiency and profitability are low at the state-owned banks can be
found in their lack of corporate governance during the transition from a
planned economy to a market economy. As in the case of other state-owned
enterprises in
Indeed, the aim of
listing state-owned banks is to try to solve these problems by dispersing
ownership. However, as can be seen from the behavior of state-owned firms that
have already gone public, it will be difficult to establish corporate
governance at the four major banks if the state continues to hold a majority of
their shares. In fact, the return on equity of
Public ownership and
market economy are incompatible to begin with. In order to establish corporate
governance suitable for a market economy, the government must not stop at
listing the state-owned banks, but in the end it must also fully withdraw from
their ownership and management through "privatization." Through this,
it becomes possible for domestic and foreign investors with a strong interest
in the banks' management to become major shareholders while enabling the
government to dispose of the non-performing loans that were separated from the
banks using the proceed gained by selling off its
shareholdings.
Needless to say, in the
course of privatization the government must prevent insiders such as senior
executives of the firms from illegally appropriating state-owned assets, which
are essentially owned by the people, for their own use. As a matter of fact,
irregular accounting and false reporting are rampant at state-owned companies
that have gone public, and there is no end to scandals related to fund
procurement and transactions among related businesses. This is shaking trust in
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(Source) 2004 Global
500, Fortune July 26, 2004 |
