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When the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC) held their sessions in early March, one of the hottest topics for the financial circle was the restructure and initial public offering (IPO) of state-owned commercial banks.
Though the authorities have not attached any timetable to the IPO and the two banks most likely to go public before others - the Bank of China (BOC) and China Construction Bank (CCB) - only "leaked" their potential plan informally, there was a palpable sense the offering scheme will soon become reality.
Since it is almost certain these banks will be listed, how can the initiative for getting banks on the stock market be turned into an opportunity for furthering financial reform?
Measures taken at the Executive Meeting of the State Council, the Leading Group for Comprehensive Reforms of State Banks and the China Banking Regulatory Commission (CBRC) underlined the authorities' determination to push forward such reform.
One measure stands out: Making those responsible for losses incurred by defaulted loans accountable - and even punishable.
This clause, never previously included in listings of State-owned enterprises or banks, represents a remarkable breakthrough. If this system is put into practice, the pursuit of financial reform rather than the listing itself will be fully evident.
We used to merely discuss the importance of enhancing the internal discipline of banks and impeaching those responsible for granting bad loans.
Under the current system, bank employees who decide to grant loans are seldom held liable if the loans become irretrievable later. Senior managerial personnel see slimmer chance of being caught for losses from bad loans unless they are found taking bribes or other forms of corruption.
When a bank is preparing to get listed on the stock market, it is very likely that bad loans and non-performing assets could simply be written off due to two reasons.
One is an ingrained habit of attributing bad loans to exterior factors. The other is that regulators' concern that if too many problems are exposed during the bank's consolidation to internal discipline, the image of the bank and its IPO will suffer.
Given the pending plans for IPO on domestic or even overseas markets, it is easy to understand that reluctance.
But such hesitation will both let producers of huge losses off the hook and leave open the possibility for them to become senior managers or the heads of listed companies. Such was the case of Liu Jinbao, the former vice-chairman of BOC who was removed from that post earlier this year.
The hard lessons of the past cannot be forgotten.
What relieves financial observers and the public is that decision-makers are most concerned about the financial reform with joint-stock restructuring as the priority. And concrete moves are being taken to ensure those responsible for bad loans are not easily ignored.
On March 2 the State Council held a special conference that included "dealing with non-performing assets, probing into relative cases and punishing those liable" in its six key missions.
On March 11 the CBRC issued a guideline for BOC and CCB's public offering, in which it stressed the two banks should investigate cases against the law or related regulations and penalize employees that contravene the law or related regulations when the banks dispose of historical losses.
BOC and CCB were chosen to carry out the pilot programme to reform the nation's four State-owned commercial banks into joint-stock entities when the NPC and CPPCC sessions were held. Primer Wen Jiabao described it as a "practice we cannot afford to lose" and "failure is not allowed."
CBRC chairman Liu Mingkang made it very clear that "those who caused the great losses in the past should not be let loose."
All these moves and remarks not only impress the public but also have laid a solid foundation for reform.
Of course, the pilot programme in financial reform is aimed at establishing a comprehensive restructure and a new managerial method in the banks. Besides the determination of counting the responsibility of historical loss, several other steps are worthy of attention.
It is required that the shareholders conference, board of directors and board of supervisors of listed banks should keep their own independent roles and functions while co-operating with each other. This will alter the traditional decision-making process in the banks.
The human resource system in banks is also required to change and introduce a new set of awards and punishment mechanisms covering every employee regardless of his or her position.
The restructured banks should choose their strategic investors, both domestic and abroad, in a fair and transparent manner. But the application of such demand is a difficult mission to complete.
In promoting financial reform, these aspects are no less important than the accountability system, and they may have an interplay among themselves which could ultimately impact the final result of the reform.
IPO is only a means to further the reform, even though the market is anxiously awaiting an IPO timetable.
Judging from recent moves by the pilot banks and the CBRC guidelines, a major reform in China's banking sector will be launched sometime this year.
And it's a reform for which failure is not an option.
Note: The article is written by Hu Shuli, the chief editor of the Beijing-based Caijing Magazine.
(China Daily April 6, 2004)
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