Foreign strategic investors should be allowed to buy higher stakes in China's regional banks, suggested Cheng Siwei, vice chairman of the Standing Committee of the 10th National People's Congress, at a forum on November 12.

The forum, with a focus on financial technical innovation and regional financial development, was organized by Finance News and the Regional Finance Forum Organizing Office between November 12 and 14 in Beijing.

According to China's World Trade Organization (WTO) commitments, it is to full open up its banking sector by the end of 2006. In a bid to improve their competitive advantage before then, many Chinese banks have implemented measures such as joint-stock restructuring, inviting foreign investment, and public listing.

To facilitate market-oriented restructuring, a total of 112 regional commercial banks have already set about courting strategic investors. Foreign investors have made inroads into banks with potential profitability including Shanghai Bank, Nanjing City Commercial Bank, Xi'an City Commercial Bank and Jinan City Commercial Bank.

Foreign investors can help sort out a domestic bank's systematic loopholes and shoulder part of the risks as well, Cheng said. He also said that relevant pricing mechanism should be made clear from the start.

"You can't simply compare foreign investment and their gains," Cheng said, citing China Construction Bank, Bank of China, Industrial and Commercial Bank of China as examples. After the three major state-owned banks accepted strategic investors, their net asset values have increased from 10 to 17 percent. Cheng added that the Chinese banks are the main beneficiaries of this growth since they hold the majority stake.

Cheng also refuted allegations that the introduction of strategic investors will threaten the country's financial security.

He pointed out that the bank's financial risks are mainly composed of a low capital-adequacy ratio, high incidence of non-performing loans, operational risks and internal control problems as well. The purpose of introducing foreign strategic investor is to strengthen governance mechanisms and solve the problems from the inside out.

Current government regulations state that foreign strategic investors can hold up to a 25 percent stake, and individual investors up to a 20 percent stake in Chinese banks.

There is much support for reform. Guangdong Development Bank reportedly put forward a proposal to transfer 51 percent of its shares to foreign investors, but China Banking Regulatory Commission officials have denied this, saying that there is no possibility of this happening in the short term.

In terms of the regional commercial banks, with troublesome debts and limited influence, they seem to be less attractive to foreign investors than any of the big-four state-owned commercial banks. Cheng noted that a 25 percent stakeholding would do little to improve corporate governance or boost joint-stock restructuring. Cheng proposed raising the stakeholding ceiling to 33 percent, arguing that it would not rattle the state's majority shareholding.

Whether the regulatory authorities accept his proposal remains to be seen.

(China.org.cn by Tang Fuchun, November 18, 2005)