Tactics for Reforming State-owned Commercial Banks

These were reiterated by Xianglong Dai in a recent speech at the Fortune Global Forum 2001. Dai, the governor of the People's Bank of China, disclosed that the central bank was going to support the efforts of the commercial banks to restructure themselves into joint-stock banks, while at the same time promoting the public listing of joint-stock commercial banks. Later, the wholly state-owned banks "with good conditions" would be transformed into joint-stock banks with the majority of shares still to be owned by the state after an initial public offering.

Obstacles to Success and Possible Solutions

Presently, all of China's state-owned commercial banks have serious problems. The most severe problems are: i) inadequate corporate governance structures; ii) insufficient capital; iii) high levels of non-performing loans; iv) low rates of return on capital; and v) lack of information disclosure to the public.

Reform of the banking system as a whole depends largely on what happens at the wholly state-owned commercial banks. The most important ways to reform these banks is to introduce scientific and normative corporate governance and effective supervisory systems, and to transform them into joint-stock banks.

The key contents of the new regulations, the Guidance on the Corporate Governance of Joint-stock Commercial Banks (7 chapters and 84 articles) and the Guidance on Independent Directors and External Supervisors of Joint-stock Commercial Banks (5 chapters and 34 articles), focus on the following issues:

i) distinguishing the functions of the shareholders, board of directors and board of supervisors; and standardizing the rights, obligations, and responsibilities of the shareholders, directors, supervisors and presidents of the banks;

ii) standardizing the behaviour of shareholders, and preventing them from damaging the interests of depositors by controlling the bank's management;

iii) establishing a system of independent directors, and improving the organizational structure and decision-making procedures of the board of directors;

iv) defining the function of the president of the bank, and defining the rights and obligations of chairman of the board and president of the bank;

v) establishing an exterior supervisory system, and improving the organizational structure of the board of supervisors, to effectively supervise and promote the sound management of the bank; and

vi) improving employee morale to help the banks to prosper.

These two regulations have been formulated in accordance with the PRC, Company Law (中华人民共和国公司法), PRC, Commercial Banking Law (中华人民共和国商业银行法) and the PRC, People's Bank of China Law. If the state commercial banks (especially the wholly state-owned commercial banks) can evolve successfully according to provisions and goals in the two regulations, we shall have reason to believe that the state-owned commercial banks will move towards privatization in the near future and will become limited liability corporations or joint stock limited liability corporations. And though improving corporate governance mechanisms, restructuring shareholdings, and working towards IPOs are steps towards reform, the essential aim is to bolster the asset structure in commercial banks, so that commercial banks may strengthen their ability to minimize risks, guarantee stable operations, and sustain their development.

By Anthony Qiao

Zhong Lun Law Firm,

Shanghai