Friday, March 18, 2005

We heard earlier this week that Zhang Enzhao, the Chairman of China Construction Bank, was stepping down due to alleged corruption. While that has become the norm at CCB, whose former president was also indicted of graft (Wang Qishan), the current choice of bank party secretary (meaning he will also serve as chairman) is unusual. Instead of appointing another banker, the party has decided on Guo Shuqing, a technocrat who has never worked a single day in a commercial bank. Clearly, the State Council wants to establish some degree of credibility at the CCB before the planned IPO. If that is the regime's purpose, Guo will likely be a trouble-shooter who cleans house and steers CCB through the IPO process before moving on to another post. I believe that appointing Guo, a well respected technocrat who runs China's foreign exchange policy, will provide the stability needed to weather the IPO. Nonetheless, there are several interesting points about this appointment.

1. It is rather sad that the central government would need to appoint someone with no banking experience to assure potential investors. Instead of Guo, they also could have assigned someone with more banking experience, like Wu Xiaolin, or better yet, someone in the commercial banking sector. Apparently, the leadership does not trust any banker 100% as it trusts Guo.

2. Relatedly, the choice of Guo is rather strange, since again, he has no banking experience and also it would be a step down for Guo from his current post of foreign exchange czar. Though nominally a step down, becoming CCB's helmsman through the first IPO of a major state bank can add an important zhengji (administrative merit) to Guo's resume. Building up points is more difficult at the State Administration of Foreign Exchange since everyone knows that any major policy needs to be approved by the State Council, and he has been stuck with the thankless task of preventing hot money from flowing into China, which only earns him the ire of local officials in the coastal provinces. If he successfully shepards CCB through the IPO, he will go down in PRC economic history books.

3. The final question is who maneuvered him into this choice position at this opportune time. As I speculated before, I think Zhu Rongji has an active hand in this, although I am sure Wen Jiabao is playing right along. First, Zhang Enzhao had been a long-time banker in Shanghai where he no doubt cultivated deep ties with senior Shanghainese officials, including both Wu Bangguo and Huang Ju. By removing him, it weakens Huang Ju's hold over the financial sector and might be part of the on-going struggle between Hu-Wen and Jiang's faction. Even if we ignored the broader political context, Guo has always been one of Zhu's favorites, which resulted in his rapid rise through the State Commission for Restructuring the Economy bureaucracy in the 90s and eventually into the PBOC. By giving Guo this assignment, Zhu positions Guo to become a minister by the 17th PC (perhaps Zhou's replacement at the PBOC once Zhou gets a promotion into the State Council) and perhaps a vice premier by the 18th PC.

Should investors be happy? In the short-term, Guo's appointment virtually guarantees that the IPO will go forward and that red-tape will be cleared. In the long-run, however, it is worrisome that a career government official, instead of a career banker, is needed to assure investors. Should investors invest in a company whose stability and profitability depend on government intervention?

Beijing Taps Regulator as Head
Of China Construction Bank

March 18, 2005

Seeking to limit the damage to its second-largest lender ahead of an overseas listing, China named its top foreign-exchange regulator to become that bank's powerful Communist Party chief after the departure of its chairman under a corruption cloud.

A notice on the Web site of China Construction Bank said Guo Shuqing, now charged with looking after China's $610 billion in foreign-exchange reserves, would take the party job, putting him in charge.

There was no word on whether Mr. Guo would assume the position of chairman vacated by Zhang Enzhao, whose abrupt departure was announced Wednesday. But in China's bureaucratic hierarchy, which includes state enterprises, the top Communist Party official outranks all others. In big state banks, the chairman and party secretary are the same person.

Mr. Guo, director of the State Administration of Foreign Exchange, is also a vice governor of the People's Bank of China, the central bank. By putting one of the country's most senior financial regulators in control of the bank, Beijing is giving a clear signal it intends to tighten controls and improve management. At the same time, China clearly wants to send a reassuring message to foreign investors ahead of China Construction Bank's planned stock-market listing this year in Shanghai and Hong Kong aimed at raising up to $10 billion.

Officially, Mr. Zhang resigned for "personal reasons," though the official Chinese media Thursday suggested for the first time that he may be in trouble. The Economic Daily said management changes at China Construction Bank should serve as a warning to officials of state banks not to abuse their powers. The "problems" exposed in the bank's management should alert state banks against any abuses, the report said, quoting an official at the China Banking Regulatory Commission. In the report, the official didn't elaborate.

Industry executives familiar with the situation say Mr. Zhang is being held in a Beijing guesthouse while authorities investigate an alleged graft scandal.

Beijing can take no chances with Mr. Zhang's successor. Mr. Zhang took over after the bank's previous head, Wang Xuebing, was fired in 2002 and jailed in 2003 for corruption charges stemming from his previous career at Bank of China, another big state bank.

The irony is that while China's banks are being pressed to become world-class commercial enterprises, the Communist Party still makes all the important personnel decisions, a legacy of the planned socialist economy when banks acted as cashiers of government, disbursing funds to state-owned enterprises.

"The central [party] decision to assign Comrade Guo Shuqing to work at China Construction Bank shows the high attention paid by the central [party] to the bank's work," the Web statement said. The comment was attributed to bank President Chang Zhenming, who took over as temporary chairman after Mr. Zhang's departure.

Making Mr. Guo the bank's party chief has "very important meaning" for stabilizing the bank and guaranteeing the orderly development of its shareholding reform and other work, the statement said.

The central bank now has an iron grip on both China Construction Bank and Bank of China, which also is seeking an overseas stock-market listing this year. A company under the People's Bank of China owns virtually all the shares in both banks after injecting capital of $45 billion into the state lenders to allow them to unload piles of bad debt.

Both banks are wooing the world's biggest financial institutions as "strategic partners" ahead of their listings. They are hoping to secure investments of hundreds of millions of dollars, as well as valuable management know-how. But industry analysts say the latest scandal could reduce the price potential investors are prepared to pay by heightening their fear of risk. Some also say developments could delay the listings.

Top Chinese officials have publicly expressed irritation and impatience with the pace of overhauls at the country's banks and questioned the competence of top bank executives. Fixing the country's debt-laden banks by putting in place modern risk management and credit controls is vital to the health of the bank-dominated financial system.

Bringing Mr. Guo over from the State Administration of Foreign Exchange could potentially unsettle financial markets at a time when speculation is swirling about a change to the country's system of fixed exchange rates.

Surging capital inflows, some speculative, are making it hard for Chinese authorities to hold inflation in check. Expectations are growing that Beijing will seek to relieve the upward pressure on money supply by making its exchange rate more flexible. Mr. Guo has been quoted as saying in the past few weeks that changes to the foreign-exchange system are on the way, without suggesting any timetable.

Write to Andrew Browne at andrew.browne@wsj.com and J.R. Wu at jr.wu@dowjones.com

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