China Construction Bank (CCB), which plans to sell shares in Hong Kong before the end of this year, has taken a raft of measures to beef up internal auditing.

Yu Yongshun, general manager of the bank's Audit Department, told reporters yesterday that since March this year, the CCB has begun to adopt a "vertical management" model for internal auditing.

This means auditors at the bank's local branches report auditing results directly to the headquarters, he said.

Earlier, the reports were first submitted to the presidents of the local branches. Auditors are now supervised, and their salaries set, by the headquarters.

Also, 10 percent of the auditors will exchange posts every year to ensure that they can work independently, Yu said.

"These measures will increase the independence of internal auditing," he said.

During the first half of this year, auditors made 9,200 proposals of which more than 6,100 have been implemented, Yu said.

Economists note that the bank's increased emphasis on internal auditing suggests it is trying to improve its management before foreign competitors enter the Chinese market without restrictions before the end of next year.

The bank has already taken a series of measures including allowing in foreign strategic investors to increase its competitiveness, one economist said.

On June 17, the bank signed an agreement with Bank of America to sell a 9 percent stake for US$3 billion to the US bank.

Bank of America will also have the option to buy additional shares to increase its ownership in CCB to 19.9 percent.

As part of the strategic program, Bank of America will provide about 50 personnel to advise CCB in areas such as corporate governance, risk management and retail banking.

On July 1, CCB reached a similar agreement with Singapore-headquartered Temasek Holdings (Private) Limited on a strategic partnership.

Under the agreement, Temasek will invest US$1 billion in CCB through its wholly-owned subsidiary Asia Financial Holdings Pte Ltd (AFH), and will purchase shares from China SAFE Investments Ltd the largest share-holder of CCB.

AFH will also assist CCB in improving corporate governance.

CCB, which was given a US$22.5-billion capital injection by the State in late 2003, is a pilot project in the country's banking reform.

Last September, the bank was split into two China Construction Bank Corporation and China Jianyin Investment Limited.

The former, the listing vehicle, continues to operate the banking business while the latter will handle the non-banking business.

By the end of last year, the bank's non-performing loans dropped to 3.92 percent, while its capital adequacy ratio increased to 11.29 percent.

Profits rose 34 percent last year to 50.2 billion yuan (US$6.2 billion) as new lending increased 11.5 percent to 229.6 billion yuan (US$28.3 billion).

(China Daily August 17, 2005)