Are state-owned commercial banks sold at cheap price when listed? Will the massive entry of overseas strategic investors endanger the financial safety of China? Who are protected under the “Protective Clauses”? Why not introduce domestic strategic investors? …… After the first commercial bank was successfully listed, some people concerned about the reform of state-owned commercial banks presented their doubts, which push the reform of state-owned commercial banks to the hotspot of the society again. On November 25, Xiao Gang, President of Bank of China Limited was exclusively interviewed by Xinhua News Agency on these hotspot issues.
Is State-owned Bank sold at cheap price?
Reporter: Half a year ago, we worried that state-owned commercial banks facing many difficulties and therefore could not find “good buyers”, or sell at good prices. However, when the first commercial bank was listed, the public subscriptions in HK are over 40 times, while the subscriptions of international institutions are over 9 times. As the previous price offered to overseas strategic investors was remarkably lower than IPO price, people began to worry whether the state-owned bank was sold at cheap price.
Xiao Gang: These two worries make a certain sense. The key to the answer is how to fully and objectively view the current situation of state-owned commercial banks. When the reform started, some people saw many problems and difficulties in state-owned banks, and thus lost confidence in the joint-stock restructuring. However, with efforts in the recent two years, the reform gets remarkable achievements and state-owned commercial banks are in better financial situation and one of them was even successfully listed. Some people become over optimistic. They think state-owned commercial banks are “the flower loved by everyone”, and generate the worry that “Good achievement cannot flow into other account”, In fact, China formally released and carried out the Law of the People’s Republic of China on Commercial Banks in 1995, state-owned commercial banks are much to be improved compared with international leading banks. It is a long and complicated progress to carry out the reform in state-owned commercial banks.
The direct reason for the reversion of people’s worries is that overseas investors purchase shares of state-owned commercial banks. That capital pursues profit,which is a unchanged economic law. Overseas capital comes for profit and undertakes the risk. If NPLs in state-owned banks rebound greatly and the operational benefit falls down in the future, it may be quite difficult for them to get return for the investment. They purchase share of Chinese banking because they think highly of the economy, market, investment environment as well as the development potentiality of banking sector in China, and are confident of the reform undergoing in state-owned commercial banks.
Introducing strategic investors and Initial Public Offering (IPO) are two steps in the reform of state-owned commercial banks. Although both involved pricing, their mechanisms, objectives and strategies are quite different, hence it’s not wise to draw comparison directly. From the perspective of pricing mechanism, the pricing of introducing strategic investors is done through the one-to-one negotiation, while IPO pricing is done through the selling to international investors and the public. From the perspective of pricing objectives, strategic investors are different from public investors in nature and function. Strategic investors are willing to carry out long-term business cooperation with the enterprises and share the risk. They often promise long lock-up and competition evasion. Many public investors think more about the return from stock investment; and may either hold long-term stocks or carry out short-term speculation. Therefore, the stock price offered to strategic investors before IPO, is usually lower than IPO price. From the perspective of pricing strategies, introducing of the international famous institutions as strategic investors will help increase intangible assets and improv image and market value of an enterprise. In line with the international practice, intangible assets are often taken into consideration during capital introduction and pricing.
Will overseas capital endanger the financial safety in China?
Reporter: Foreign capitals successively enter Chinese banking industry as strategic investors or financial investors. Some think that too much foreign capital which is invested in a long term will endanger the financial safety in China.
Xiao Gang: Without the reform, the lack of capital in state-owned commercial banks, the increasing NPLs and the false financial information will be the most hidden problems endangering the financial and economic safety in China. After introduction of foreign strategic investors, state-owned commercial banks could obtain advanced experience and business mechanism from investors, and build modern shareholding commercial banks with sufficient capital, strict internal control, safe operation, good service and sound profitability and international competitive edges. This is the most powerful support and guaranty to the financial and economic safety in China.
According to the regulations in China, single foreign investor cannot hold shares more than 20%. The proportion of investment of all foreign organizations can’t reach more than 25%. That means, China have the absolute control over state-owned commercial banks despite of introducing foreign strategic investors. Besides, with IPO and continuous offering of banks, share proportion hold by foreign strategic investors will be further “diluted”. The absolute control on state-owned banks is still in the hand of China.
Who are protected under the ”Protection Clauses”
Reporter: Media reports that Bank of China promised guaranty when signing agreements with foreign strategic investors. Moreover, some clauses are good for foreign sides. What are the specific situations?
Xiao Gang: In the investment agreement, both BOC and the strategic investor have some promise and restriction clauses. We cannot disclose the details unilaterally due to the confidential agreement. However, I dare to say that, these guaranty promises reflect the sincerity of two sides on cooperation and are the necessary conditions for effective implementation of the agreement. Promises, rights and obligations are reached through thorough negotiation and they are fair,
Why not introduce domestic strategic investors?
Reporter: Many domestic large-sized enterprises want to participate into the joint-stock reconstructing of BOC. Why does Bank of China close the door to domestic strategic investors?
Xiao Gang: Different from common financial investors or institutional investors, strategic investors plan for a long-term cooperation at the aspects of business, personnel, management and technology. They establish a cooperation relationship with investees, and further cooperate at some business fields to pursue the leading role or famous products. The two sides will get long-term benefits. Therefore, it is beneficial to introduce large powerful foreign financial enterprises as strategic investors for development of Bank of China . The reason for introduction of strategic investors is not the lack of money, but for the advanced operation concept, management experience and technology. With them, Bank of China will strengthen the corporate governance; improve risk management and internal control; increase innovation and profitability of products and strengthen the core competence.
In addition, introduction of foreign investors will help to deepen the reform of state-owned commercial banks so as to stop the “blooding mechanism” of strip-off NPLs according to national policy. Foreign strategic investors emphasize assets quality and the prevention and decreasing of NPLs at the very beginning. They have strict requirements on how to authenticly, exactly, completely and promptly disclose financial information. These will help Bank of China to improve the risk management and internal control, improve the transparence, further fasten the system and mechanism reform, and improve the Bank’s ability of “hemopoiesis”.
Can “good mechanism” be purchased?
Reporter: On December 30, 2003, the State injected USD 22.5 billion to BOC as capital. At that time, there was a popular saying that, “paying money to buy a good mechanism”. After two years, is the original will realized?
Xiao Gang: After we got USD 22.5 billion registered capital from the State, the capital is operated in special account and by special person. Currently, considerable investment return is obtained from the capital under the precondition of safety. In order to hedge foreign exchange rate risk, Bank of China guarantees the value of the foreign exchange capital through option transactions; foreign capital is not depreciated due to the appreciation of RMB. During the nearly two years’ reform, BOC actively pushes forward the reconstruction of various mechanisms.
Good corporate governance mechanism will be gradually established. The Board of Directors, Board of Supervisors and the senior management perform their own duties. Corporate governance mechanism with clear rights and obligations will be gradually established to effectively balance and coordinate operation among the decision-making departments, the regulatory authority and the management. Before the reform, I shoulder three positions, Secretary of Communist Party Committee, Chairman and President of the Bank. Now, as Secretary of Communist Party Committee and the Chairman, I am not involved in daily business management which is left in the charge of the President.
Business concept is changed to avoid old way of "great development-huge NPLs-large strip-off". On the business development, “Priority of capital restriction, quality control, benefit assessment and strategy focus” is brought out, and performance assessment index is adjusted a lot. Now profit after-tax is assessed instead of business profit before provision. The average profit that was not assessed before is now defined as an important index. In addition, two new assessment indices are introduced, including the return on risk weighted ROA and ROE. Some indices are still to be improved, however the direction of reform is quite clear.
The risk management system is further improved. The Risk Policy Committee is set up under the leadership of the Board of Directors, and chaired by independent director. The Risk Policy Committee is responsible for the complete and full management on credit risk, market risk, operational risk etc. Approval right of credit business is concentrated at the Head Office and tier-1 branches, and the Head Office approves and verifies the five-category loan classification according to the unified standard of the Head Office. Since 2006, both balance and rate of NPAs have been reduced.
Internal control is strengthened. Auditing mechanism is established under the Board of Directors and the Auditing Committee, improving the independence, effectiveness, profession and authority of supervision and auditing. Internal Control Committee is chaired by the President. Strengthening the supervision over key steps and important parts, including loan approval, usage of large capital, financial expenditure and personnel appointment. Regular supervision and special inspection are combined, and internal control and external audit are integrated together. Strict and effective supervision system for internal control has been established.
Will joint-stock reconstructing of Banking sector affect macroeconomic adjustment?
Reporter: After joint-stock reconstructing of the state-owned commercial banks, the banks are no longer dominated by state shareholders. Will it affect the transmission and effect of government macroeconomic policies?
Xiao Gang: After reform of the state-owned commercial banks, the commercial banks will operate according to commercial principle. Independent loan approval, professional assessment and scientific decision will change the non-market actions of administration authority, like “instructive loan” and “appointed loan”. However, state-owned commercial banks still have credit innovation function. It is the important carrier for government macroeconomic policies, especially the currency policy mechanism.
After the reform of the state-owned commercial banks, the government will conduct macroeconomic control with market-oriented tools and methods, such as interest rate, exchange rate, re-loan, bank supervision, window guidance and credit policy instruction, and won’t directly interfered the bank operations through administration intervention, credit line, appointed loan and so on. Fundimentally speaking, the interest of state-owned commercial banks is in line with the national interest and social benefit. It is not only the responsibility of the Bank, but also beneficial for the improvement of risk management of the Bank. So, it is a necessary choice for state-owned banks to actively carry out the macroeconomic adjustment. Meanwhile, with the implementation of joint-stock reconstructing, the self-discipline mechanism of commercial banks will be enchanced the commercial banks are enabled to flexibly and rationally adjust their total amount and structures of assets and liabilities based on the macroeconomic adjustment signals, hence to transmit and transfer the national macroeconomic adjustment policies to entity economy more smoothly and effectively.
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