Wednesday, May 25, 2005

Guo Shuqing combines state and market to move IPO forward

It has been over two months since Guo Shuqing, formerly the head of State Administration of Foreign Exchange (SAFE), became the chairman of the board of director at China Construction Bank. Those who had hoped that his political clout would speed up the listing process are surely not disappointed. At the recent Fortune Global Forum, Guo promised that "Unless there are special circumstances, I think we should be able to list our shares this year." At the Forum, Guo also held serious talks with Citibank CEO Charles Prince concerning Citibank acquiring up to 10% of CCB shares as a strategic investor. Guo Shuqing, long known to be a favorite of former Premier Zhu Rongji, is clearly translating his no-nonsense administrative style and political clout into a speedier IPO process. Guo’s success, however, also demonstrates the continual importance of the government and the party in the financial sector today.

To be sure, Guo jumpstarted some important market reform since his arrival in CCB. For one, Guo is experimenting with the difficult transition of separating the party committee from the board of directors and disentangling both of them both from the bank management. Moreover, Guo promises that major decisions, including personnel decisions, will be decided by the bank management instead of by the party committee. This will presumably give foreign investors a role in major decision making after they become major shareholders. Guo also supported the Shenzhen branch’s decision to start charging small depositors a fee, despite the fact that it is a sensitive political issue.

Guo also relies on a host of administrative measures to ensure a smooth IPO process. Borrowing a trick from his mentor Zhu Rongji, Guo instituted a new policy of firing any branch manager and even their superiors in the event of a major corruption scandal or a serious business mistake. Although a commercialized bank needs to fire crooked and incompetent managers, instituting a policy of firing someone for such lapses regardless of circumstances smack of the long-standing communist party practice of yipiao foujue, or firing on the spot for failing a particular task. In addition, Guo employed another trick from the Zhu Rongji playbook of economic management and sent 35 inspection teams to audit 38 branch banks. These administrative measures should minimize the chance of a major corruption scandal before the bank’s IPO.

Foreign banks considering becoming a strategic investor in CCB should take heart that Guo is fully utilize both the Communist Party’s administrative resources and important reform ideas to raise confidence in the IPO. But what happens after Guo finishes his historical mission and moves on to a higher post? Will the reform he institutes remain in place with the help of foreign shareholders, or will the absence of his political clout and forceful personality give rise to another round of festering corruption? Unfortunately, past experience with listing SOEs tells us that much of old way of doing business returns after the initial euphoria of the IPO wears off. This problem is perhaps even more acute for the banking sector because major banks in China remain important political tools for the CCP regime.

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