Chinese banks set for governance overhaul

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Last updated at: (Beijing Time) Tuesday, November 25, 2003

Chinese banks set for governance overhaul

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China's banking regulator has drawn up a blueprint to overhaul the governance of the country's banks, welcoming "international talent" to take key positions in state banks, supporting stockmarket listings and inviting foreign investors to take stakes in domestic banks.

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), told the Financial Times the CBRC would impose 10 guidelines to ensure that China's biggest state banks, several of which are technically insolvent, will be turned around within three to five years.

The CBRC's main challenge, Mr Liu said, was to ensure bad debt built up by the state banks was not repeated. "It's a very challenging job and my house will be responsible for making sure it will be a 'never-again story' through corporate governance and transparency," he said.

"We have 10 guidelines to make sure those state-owned banks in the next three to five years will drive into calm waters," Mr Liu said.

In his previous job as head of the Bank of China, a state commercial bank, Liu Mingkang used to describe his robust strategy to purge the bank of bad debts as "carpet bombing". Now, as the first chairman of China's banking regulator, he is sticking to his incendiary imagery.

One problem with big Chinese banks, Mr Liu said, is that their vertical structure helps obscure the irregular activities of errant branches from the bosses in head office. "You can see a lot of time bombs binding together [at lower levels] to become an atom bomb," he said.

But eight months after he became chief regulator, Mr Liu has completed a comprehensive strategy to defuse the risks that could threaten financial meltdown.

His multi-pronged approach aims to reduce the build-up of bad debts sharply by overhauling management systems and imposing strict corporate governance standards.

Mr Liu, a fluent English speaker, listed reforms intended to bring accountability, transparency, management efficiency and fair play to a banking system burdened with bad debts and the legacy of communist central planning.

Taken together, the measures he plans are tantamount to a revolution - and one based on pragmatism rather than ideology. "[The late leader] Deng [Xiaoping] made a marvellous remark: 'I do not care if the cat is black or white, as long as it catches mice'," he said.

One indication of Mr Liu's approach was the inaugural meeting last week of the CBRC's international council of advisers, the first formal body of foreigners assembled to offer guidance to a ministry-level government organ in China.

The advisers include some of the biggest names in world finance: Sir Edward George, former governor of the Bank of England; Gerry Corrigan, former head of the New York Federal Reserve; Andrew Crockett, former general manager of the Bank of International Settlements; and Sir Howard Davies, former head of the UK's Financial Services Authority.

An emphasis on borrowing foreign talent runs through the blueprint. As part of the turnaround plan, state banks should sell stakes to strategic investors and some should list on the stock market.

Lou Jiwei, vice-minister of finance, told the FT that the government would inject capital into big state banks before listing, probably one at a time as each bank demonstrated that it had reduced its bad debts and overhauled its corporate governance.

Mr Lou did not give a figure for the planned bailout but the size of the problem is significant.

Official statistics put non-performing loans in the "big four" state banks - China Construction Bank, Bank of China, Industrial and Commercial Bank of China, Agricultural Bank - at 23 per cent of total assets, or some Rmb2,000bn ($240bn, ?205bn, ��140bn).

Mr Liu held up the example of Nanjing City Commercial Bank, which sold a stake to the International Finance Corporation, the private sector arm of the World Bank.

"They invited an independent director called John Langlois [on to the bank's board]," Mr Liu said. "He is a big mouth. Push, push, push. In six months [the bank] has changed quite a lot."

Aside from directors, Mr Liu also favours appointing overseas executives to senior positions such as chief financial officer and chief technical officer at the big four, an unprecedented suggestion. In addition, the management structure of the large state banks must change, he said.

Currently, the banks had too many management layers. That allowed underlings in faraway branches to get away with irregular behaviour that eventually led to loans going bad. "They must reduce the layers of hierarchy," Mr Liu said.Motivation was another important factor, he explained. There were no share options at the moment for banks in China but they should be adopted and carefully linked to performance assessed according to the quality rather than the volume of an executive's work.

Each bank must set up internal risk management and internal controls. "I have said many times to my regulated bodies: it's your duty to catch your mice at home. It's not my job but I will count how many rats you have caught," said Mr Liu, referring to the several corruption scandals that have plagued the Chinese financial sector.

Other elements of the guidelines that the CBRC plans to enforce include improving information technology systems and the quality of statistics, stepping up training and conducting effective public relations.

The CBRC will also try to ensure banks set clear strategies for better profits. "In my eyes, house and auto financing, bancassurance, credit cards and education loans will be booming in the near future," Mr Liu said.

(Source: agency)

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