Agricultural Bank of China, Ltd. Company was officially launched today, thus concluding the shareholding reform of the "big four" state-owned commercial banks.
However, analysts think that the reform is far from finished--Agricultural Bank of China (ABC) has not yet been listed in the market and there is still a long way to go for the "big four" banks to improve their management systems and innovative capability.
The reform of the four banks was initiated ten years ago when the Treasury Ministry began to use special government bonds to inject capital into them. But reform took off in five years ago when the Central Huijin Investment Co. injected capital into China Construction Bank (CCB) and Bank of China (BOC) in 2003.
Progress of ABC's reform
The last of the big four to reform, ABC had more bad loans than the other three banks. They amounted to 817.973 billion yuan (US$119.622 billion) by the end of 2007.
The reform plan for ABC was approved by the State Council in 2008. The bank received a 130 billion yuan (US$19 billion) injection from Huijin and divested itself of all bad loans.
Pan Gongsheng, vice president of ABC said that it is still not sure whether ABC will go to the market in the late half year of 2009. Guo Shikun, the general manager of the Research Department of China Construction Bank, said that ABC will take the initiative in negotiations with strategic investors.
Reform path of other 3 big banks
A research report issued by People's Bank of China shows that by the end of June, 1997, the bad loan ratio of ICBC, ABC, BOC and CCB was as high as 30.21%. The bad debt reserve of the big four state-owned commercial banks was in serious deficit. In 1997, only 25-28 billion yuan (US$3.66-4.1 billion) of bad debt reserves were available, not enough to cover bad loans that were constantly being generated.
How to turn the big four banks into financial giants with strength and vitality? The key words were capital injection and reform.
The shareholding system reform was unveiled when Huijin came onto the scene as an investor. By the end of 2007, the bad loan rates of ICBC, BOC and CCB were respectively 2.74%、3.12%、2.60%, with capital adequacy ratios all above 12%. Their capital profit rates were respectively 16.15%、14.22%、and 19.50%, and their cost-income ratios (CIR) were respectively 34.48%、38.07%、and 35.92%. Statistics from the third quarter of 2008 showed that the capital adequacy ratios of the three banks were respectively 12.62%、13.89%、and 12.10%, and their bad loan ratios were 2.37%、2.58%、and 2.17% respectively.
Yin Jianfeng, an expert from the Finance Research Institute of the Chinese Academy of Social Sciences, said that the outstanding accomplishment testified that the reform was successful.
Huge cost
In 1998, the Treasury Ministry issued 270 billion yuan (US$39.5 billion) of special government bonds to inject into the big four state-owned commercial banks; and their corresponding assets management companies divested about 1.4 trillion yuan of bad loans from the commercial banks; In January 2004, the State Council decided to inject US$45 billion of foreign exchange reserves into the BOC and CCB; In April 2005, the State Council approved an additional US$15 billion of foreign exchange reserves to complement the capital fund of ICBC, and PBOC issued central bank notes to help ICBC divest 459 billion yuan (US$67.13 billion) of suspicious loans.
The Treasury Ministry provided 10 billion yuan (US$1.46 billion) of capital funds to each of the "big four" assets management companies when they were founded, and the central bank lent them 570 billion yuan (US$83.36 billion).
Yin Jianfeng said the cost should not be afforded by banks alone, because at that time, banks had also shouldered some responsibilities for social economic reform and social stabilization. But after the reform, the bad loan issues should be dealt with according to market principles.
Are the "big four" strong enough?
Shareholding reform is just the first step in the transformation of the large state-owned banks, noted Yin. "No significant change has happened to the management system of the large-sized state-owned banks so far; and the efficiency of the banks is bound up with financial system reform which has a long way to go in China."
Guo said that the management mechanism of the large-sized state-owned banks is moving in a market-oriented direction. He said the reforms should focus on the following four points: business transformation, risk control, improvement of management systems, and business innovation.
(China.org.cn by Fan Junmei January 16, 2009)
