Wednesday, September 01, 2004

Xie Ping strikes again. So, the head of the PBOC's Financial Stability Department said a few days ago that the government might list majority shares in Bank of China and the China Construction Bank. Of course, the WSJ got very excited and immediately filed a story. First of all, Xie Ping represents the most reform-minded element in the PBOC, and he is also known for blabbing his mouth about all kinds of subjects. For example, as a junior researcher in the PBOC, he wrote several articles about interest rate liberalization. When he became the head of research under Zhu Rongji, he continued to write articles and tell the foreign press about the impending interesting rate liberalization in China. Guess where we are in interest rate liberalization--no where. I think it is good that the PBOC has someone like Xie Ping to always push the envelope toward more reform. However, the top leaders in China will not be pushed into a corner by this kind of talk. Again, interest rate liberalization is a perfect example. Although PBOC technocrats and scholars have been lobbying for it for over a decade, very little has occurred because central leaders find interest rates to be a powerful tool to control.

So, Xie Ping's comment should be interpreted as part pushing the envelope and part obfuscation. By making this comment, he is again pushing the envelope. I see very little possibility that the government would list the majority of shares in these two banks. They are simply too important to let go. The obfuscation comes from his wording that the shares should be "tradable." As the SCMP piece points out, this doesn't mean that the shares would be tradable to the public, but might be tradable among a few strategic investors, including major foreign players and state investment firms like Huijin and CITIC.

China May List Banks Without Keeping Shares --- Government Move Seeks To Change Lending Culture At State's Big Four Banks By Owen Brown and Andrew Browne 581 words 1 September 2004The Wall Street JournalA10English(Copyright (c) 2004, Dow Jones & Company, Inc.)

BEIJING -- China could list two big state banks without keeping a chunk of nontradable shares in state hands, a central-bank official said, a proposal that underscores Beijing's desire to use a listing to impose market discipline and outside oversight on the banks.
Xie Ping, director of the People's Bank of China's Financial Stability Department, told the central-bank run Financial News that as long as the China Construction Bank and Bank of China conform to the relevant regulations of the China Securities Regulatory Commission, their overseas and domestically listed shares should remain tradable. He said shares held by Central Huijin Co., a company set up by the State Council in late 2003 to hold the government's controlling stake in the banks, also should be tradable under these conditions.
This marks a significant change from many previous privatizations in China, in which the government has retained a huge controlling stake in listed domestic firms through state and legal-person shares. State shares can't be traded, while legal-person shares can be transferred only between state-owned companies and agencies.
Both types of shares were used to maintain state control over listed companies to fend off criticism from conservative government members opposed to privatizing state assets.
But these separate classes of stock have cast a shadow over the value of tradable shares, with investors worried that the government could at any time release them into the retail market, driving down prices.
In addition, the fact that the majority of a company's shares aren't traded means that the boards of listed companies worry little about public shareholders. That defeats one purpose of stock-market listings, touted as a way to bring accountability to corporate boardrooms in China.
Regulators appear determined to use the markets to change the lending culture of China's Big Four banks, where performance has long been measured not by profits, but by the size of loan portfolios. That has contributed to a mountain of bad debt in the banking system, estimated at as much as $500 billion.
To do this they are putting a lot of faith in foreign investors to inject discipline. Bank of China and China Construction Bank are looking for overseas strategic investors who will likely have representation on their boards.
Mr. Xie's comments reflect the urgency of Beijing's task to transform the country's biggest banks before the market opens fully to foreign competition in 2007, in line with World Trade Organization rules. The fear is that without market discipline, state money that has been poured into the banks to bail out their bad debts will be wasted.
Regulators have imposed tough conditions on the money. For instance, Bank of China and China Construction Bank are required to achieve a return on assets of at least 0.6% by 2005 and the average of the top 100 international banks by 2007.
Mr. Xie also indicated Industrial & Commercial Bank of China will be the next state-run commercial bank subjected to restructuring, possibly before the end of this year. But he said policy makers are still discussing the fate of the Agricultural Bank of China, regarded as the weakest of the big four state-run banks, in comments that suggest the government might not favor a public-share offering.

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