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Business
Print Edition> Business
UPDATED: September 25, 2014 NO. 40 OCTOBER 2, 2014
Share and Share Alike
The crux for the mixed-ownership reform in the financial sector is to reduce the stake of state-owned capital
By Wang Jun
Share

In spite of the fact that the prices of bank stocks remain stagnant, Central Huijin Investment Ltd., a state-owned investment company with authorization by the State Council to invest in major Chinese state-owned financial enterprises, has increased shareholdings in state-controlled banks.

Moreover, most city commercial banks are actually controlled by local governments. Private shareholders do not have much of a say in the decision-making processes of these banks. In recent years, city commercial banks have become virtual cash machines for local governments seeking funding for infrastructure projects and corporate financing.

Niu Ximing, President of Bank of Communications, thinks that at the level of corporate governance, the mixed-ownership reform must improve on the conventional model of corporate governance, which consists of a general meeting of shareholders, board of directors, board of supervisors and senior management, by establishing a mechanism whereby the board of directors and senior management operate independently but maintain oversight over one another. This would ensure that the board of directors plays a major role in strategic management, management of senior officials, reward management and risk control.

In its July announcement, Bank of Communications claimed it is conducting feasibility studies in respect of the furtherance of its mixed-ownership reform and the improvement of its corporate governance system, so as to push forward the overall reform of the bank, strengthen the mechanisms of risk control and accountability and simulate the institution's overall vitality and competitiveness.

Unifying stock incentives

Mixed-ownership reform is included in the Decision on Some Major Issues Concerning Comprehensively Deepening the Reform adopted at the Third Plenary Session of the 18th Central Committee of the Communist Party of China, which vows to vigorously pursue the development of a mixed economy and allows mixed enterprises to implement employee stock ownership plans to form communities of capital owners and laborers.

As China's financial sector developed, the problem of monopoly and issues related to the corporate governance of the banking industry affected the sector's efficiency. In July 2011, the China Banking Regulatory Commission (CBRC) began to allow commercial banks to formulate their own middle- and long-term stock incentive plans in accordance with relevant state laws and regulations.

Shang Fulin, Chairman of the CBRC, said that by now, 80-90 percent of commercial banks have completed their joint-stock reform. They must now focus on the area of corporate governance to improve their system of checks and balances, ensure more reasonable and stable business operations and decision making and explore avenues for establishing middle- and long-term stock incentive plans.

Encouraging private capital

In the past decade, foreign financial institutions such as Goldman Sachs, Citigroup Inc., Morgan Stanley, UBS AG and the Royal Bank of Scotland Group PLC had invested heavily in China's major state-owned commercial banks as strategic investors. But following Bank of America selling all its shares of China Construction Bank in September 2013, they all have withdrawn from Chinese banks.

It's widely considered that foreign investors may have left owing to their concerns regarding debt risks in Chinese banks, and it may also be the case that the Chinese banking sector was overseas investors' destination of choice for arbitrage. "In the past, we thought foreign financial institutions were strategic investors, but I'm afraid it's not that simple. Their investments are more for arbitrage purposes rather than long-term strategic investment," an anonymous analyst from one of the four largest state-owned banks told Economic Information Daily.

Now, supervisory authorities are roundly encouraging financial institutions to introduce investment so as to change their stockholding structure, under the auspices of the mixed-ownership reform. Zhou Yanli, Vice Chairman of the Chinese Insurance Regulatory Commission (CIRC), stated the insurance industry will improve corporate governance and step up market-oriented reform, be more open to domestic and foreign investors and encourage private investors to participate in the reform of state-owned insurance companies. The CIRC is set to support development of insurance companies with mixed ownership.

The China Securities Regulatory Commission has also vowed to support the establishment of securities companies by private investors, professionals and other qualified investors, and to relax access to domestic securities companies by foreign investors. It will encourage securities companies and asset management companies in instigating mixed-ownership reform, and allow state-owned and collectively-owned capital, and private and individual investors to enter the futures industry, thereby effecting mixed-ownership reform in the sector.

"Mixed-ownership reform in the financial sector involves many issues, as opposed to merely representing reorganization of shareholding structures. The stake state capital enjoys can be reduced to allow more private capitals, but what is more important is that private investors should have more power in the decision-making process," Guo Tianyong, a professor with the School of Finance at the Central University of Finance and Economics, told Economic Information Daily.

The Four Types of Financial Institutions in China

The first type: Those controlled by the Central Government, with the Ministry of Finance, or Central Huijin Investment Ltd., as the actual controllers, including Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Bank of Communications, China CITIC Bank, China Life Insurance (Group) Co. and People's Insurance Company (Group) of China Ltd.

The second type: Those held by state-owned enterprises (SOEs), which are managed by the State-owned Assets Supervision and Administration Commission of the State Council, including China Merchants Bank (controlled by China Merchants Group and other three central SOEs) and China Pacific Insurance (Group) Co. Ltd. (with Baosteel as the largest shareholder).

The third type: Having local governments acting as controllers, such as Shanghai Pudong Development Bank, Industrial Bank Co. Ltd., Huaxia Bank, Bank of Beijing, Bank of Ningbo and Bank of Nanjing.

The fourth type: Those controlled by private or foreign investors, such as China Minsheng Bank, Ping'an Bank and Ping'an Insurance (Group) Co. of China, Ltd.

Email us at: wangjun@bjreview.com

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