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Listing of Chinese banks
delayed
By Alexis Chui
HONG KONG - It is likely that China's
aspiration to list its largest state-owned banks
on overseas stock markets by the end of the year
will have to be postponed. The main reason,
according to financial analysts, is that ongoing
Chinese banking reforms, intended to dispose of
non-performing assets and reduce corruption, are
running far behind Beijing's schedule.
It
has been widely reported that the government
intended to announce a listing plan by the end of
2005 as an effort to bolster internal banking
system reforms with pressure from abroad, since
the banks would have to meet certain international
standards of capitalization and corporate
governance in order to be successfully listed. But
the plan seems to have run off the track. On May
26, Bank of China (BOC) board chairman and
president Xiao Gang strongly hinted that the BOC
will not be ready for listing this year, citing
unfinished preparations such as the development of
procedures for the introduction of foreign
investments and the adoption of international
accounting standards.
His remarks agreed
with some earlier reports that had predicted a
delay of the potential listing. Britain's
Financial Times revealed on May 12 that the BOC is
likely to postpone listing until the first quarter
of 2006 at the earliest. BOC has not accomplished
restructuring or found a cooperative partner,
which shattered its hope to issue shares in
overseas stock exchanges this year, the Times
cited a Chinese banking source as saying.
In accordance with its World Trade
Organization (WTO) commitments made upon admission
to the organization four years ago, China must
open fully its banking sector by 2006. Because
this deadline is just around the corner, it is
increasingly pressing for Chinese banks to speed
up reform before they face up to full competition
from the outside world.
There is an
evident consensus among individual investors that
the management of the state banks is still far
from the international standard, according to an
analyst of Hong Kong-based Sun Hung Kai & Co
Limited. For one thing, there has been an
embarrassing series of management corruption
scandals at the banks; for another, the huge
backlog of non-performing loans and a record of
poor financial performance will also discourage
the public from purchasing the state banks'
shares, the analyst commented. The Chinese banking
sector urgently needs a more effective supervisory
system, and the time it will take to bring the
state banks up to international standards, and the
difficulty of doing so will obviously be greater
than Beijing originally estimated, he added.
As Joseph Cheng Yu-shek, chair professor of
political science at the City University of Hong
Kong, pointed out, low capital adequacy rates and
towering bad debts, legacies of China's command
economy, pose major barriers for the listing
of Chinese domestic banks. Professor Cheng believes
that a top-to-bottom banking facelift can never
be completed in the intended one-to-two year time
frame unless Beijing makes another financial
injection and at the same time brings official
foot-dragging under control.
Unlike their
developed-country counterparts, which usually
manage to finance themselves by issuing securities
and long-term bonds, Chinese banks have always
turned to the government. To help these
liabilities-ridden banks maintain a legally
mandated 8% capital adequacy rate, China injected
270 billion yuan (US$33 billion) into the banking
system in 1998 by issuing 30-year treasury bonds.
However, due to reckless subsequent lending and
the resultant snowballing of bad debts, the
injection soon evaporated and the capital adequacy
rate began to drop.
In order to pave
the way for the listing of the four state-run
banks, China spun off more than 1.4 trillion yuan worth of
bad debts to four state-owned asset management
corporations (AMCs), which were built specifically
to liquidate the non-performing assets. In doing
so, Beijing increased their capital adequacy rate
from 4.33% to 6.88%.
However, Ba Shusong,
deputy director of the Financial Research
Institute of the State Council's Development
Research Center, has questioned the efficiency of
these AMCs in handling non-performing loans. By
the end of 2004, the AMCs had processed a total of
675 billion yuan ($81.6 billion) worth of
non-performing assets, but only pocketed 137
billion yuan in cash - a cash-recovery rate of a
mere 20%. Professor Cheng commented that the low
efficiency may be ascribed to insincere support
from local officials, the owners of the AMCs.
Another massive transfusion followed in
2003. Some $45 billion of foreign exchange
reserves was injected into the Bank of China and
the China Construction Bank to smooth the way
toward their long-anticipated stock market
flotation. But many observers cast doubt on the
legitimacy of the move.
Besides not-up-to-par capital adequacy rates and
a continuing bad debt overhang, rampant corruption has proved
to be a major headache: incessant news
reports of bank scandals have highlighted
the ineffectual supervision of Chinese banks. In January 2005, a
director of a BOC branch fled abroad with his whole
family just before the bank found out that more than 1
billion yuan was missing. Two months later, another
BOC branch discovered that one of its staffers
had embezzled a total of 50 million yuan for
gambling purposes over the last five years.
In
the same month, the China Construction Bank
declared the resignation of its chairman Zhang Enzhao,
who had taken office only half a year earlier.
Days later, news spread that he was now in
custody, charged with receiving kickbacks of more than $1
million.
Shocked by the wave of official
malfeasance, the Stock Exchange of Hong Kong
(SEHK) has tightened its guard when it comes to
auditing mainland banks, which are now waiting for
a go-ahead for listing on the SEHK. The Bank of
Communications, mainland China's fifth-largest
commercial bank, said in its preliminary
prospectus that net profits in 2003 and 2004 hit
4.376 billion and 1.604 billion yuan respectively.
However, the 63% drop in profits triggered an
investigation by SEHK of the bank's operations.
The famous Caijing (Finance and Economics)
Magazine explained that the drop resulted from the
abolition of a favorable tax policy for the Bank
of Communications by China's Ministry of Finance.
With new flaws in the supervision of the
mainland's banking sector seemingly being exposed
almost continuously, chances look slim for the
ambitious plan to list the giant state banks in
Hong Kong by the end of 2005.
(Copyright
2005 Asia Times Online Ltd. All rights reserved.
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