Yi Xianrong

 

Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank, was recently quoted by media both at home and abroad as saying that the central government was planning to restructure the Central Huijin Investment Co, so as a commercialized institution operating on sound market principles it would take care of State stakes in financial institutions.

 

As some of the media comments pointed out, it was the first time the central bank head has openly expressed his position on restructuring Central Huijin, ending speculation about the company's future.

 

Inaugurated on December 16, 2003, Central Huijin was originally meant to help restructure the Big Four State-owned commercial banks that were loaded with large sums of non-performing loans. Its mission also included improving corporate governance of the Big Four, part of preparation for stock market listings.

 

After three of the Big Four Bank of China (BOC), the Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) issued their shares and were welcomed by investors, Central Huijin should be viewed as a successful participant in China's financial reform.

 

It also means that the time is right to restructure Central Huijin with new goals.

 

The restructuring of Central Huijin not only decides the future of the company itself; it also becomes a crucial part of the management and operation of the gigantic financial assets owned by the State.

 

By now, the financial assets of the country are more than 50 trillion yuan (US$6.2 trillion), 43 trillion yuan (US$5.3 trillion) of which are controlled by the banks.

 

As the holder of the State-owned financial assets in the financial institutions, Central Huijin must have guidelines about its mission, business mode and operation mechanism as well as its relationship with the government.

 

The idea is circulating that a financial commission should be established based on the Finance Department under the Ministry of Finance to take care of State-owned financial assets. This agency would act as a representative of the State as the owner to these assets and also manage the assets directly.

 

Many oppose this suggestion because the investments of Central Huijin in BOC, ICBC and CCB were all from the country's foreign exchange reserve, which is the liability of the central bank. In other words, these are not State-assets at the disposal of the central bank or the government.

 

Moreover, the critics believe an administrative body under the Ministry of Finance would not make a clear distinction between its business goals as asset manager and public policy targets as an administrative body.

 

Therefore, the business model of Singapore-based Temasek Holdings will probably be followed in the restructuring of Central Huijin to give it a market-based position.

 

Created in 1974, Temasek Holdings is an investment company fully controlled by the Singapore government. Holding nearly all of the country's biggest companies, from transportation, telecommunication, banking to tourism, the investment company makes considerable profits every year.

 

Governor Zhou Xiaochuan made a point in his remarks about restructuring Central Huijin. If restructured as a holding company of financial assets, it could operate according to the law of the market economy, make decisions more flexibly and have less limits on its commercial activities in the capital market.

 

Yet a new position for Central Huijin must be legally defined, no matter what its future direction.

The authorities should define by law the company's function, targets, structure, business mode, appraisal of achievement and supervision. The law should also spell out Central Huijin's relations with all relevant departments.

 

Because of the absence of such law, Central Huijin is not legally authorized though it does operate with the consent of the government. Without an explicitly defined position, Central Huijin cannot clarify its relations with the State or the central bank as an agent managing State financial assets.

 

Admittedly, the business mode of Temasek Holdings has precious value as a reference for addressing the problems encountered by Central Huijin. Yet, it would be vital for us to understand the essence of this model before we make substantial moves in its direction.

 

Established to meet market requirements, Temasek Holdings does not enjoy any favorable policy from the government, nor is it subject to any government intervention in its investment decisions.

 

Judging from the current business of Central Huijin, major changes need to be made before it can follow in the path of Temasek Holdings.

 

With full administrative penetration, Central Huijin should attribute most of its profits to government policies. Without the support of the government, it is almost impossible for Central Huijin to achieve commercial revenues on its own.

 

As the biggest shareholder of the three listed Big Four commercial banks, Central Huijin benefits from government policies. The three banks would have been unlikely to go public so quickly and be so profitable without government support.

 

The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences

 

(China Daily January 26, 2007)