A passer-by in front of a Bank of Communications branch in Nanjing, Jiangsu province, in March. (Photo/China Daily)
China's large State-owned banks aim to improve their corporate governance by diversifying ownership. The move, experts said, could have greater significance than the reforms and stock market listings of State-owned lenders at the beginning of the century.
The Bank of Communications, the nation's fifth-largest lender by assets, announced on June 16 that the State Council had approved its plan to deepen reform. The bank said it would look into introducing more private capital and launch employee and executive stock ownership plans.
By the end of March, the State held more than 30 percent of the bank's shares, a much lower holding compared with other large, State-owned lenders.
Banking insiders said the Bank of Communications would set an example for other State-owned lenders and that Bank of China was likely to be next.
Wang Hongzhang, chairman of China Construction Bank Corp, said at a news conference in Hong Kong on June 15 that his bank would also further adjust its ownership structure and invite large private companies to become shareholders.
"The mixed-ownership reform of State-owned enterprises directly targets real issues in the ownership structure," said Yu Fenghui, an economist and financial commentator.
"If major changes take place, State-owned banks will make a breakthrough toward being market-oriented and establishing a scientific governance mechanism."
The previous reform and listings of China's State-owned banks had not achieved the desired results, Yu added, explaining that although these banks went public long ago, they had not broken away from their bureaucracy-heavy ways.
Their corporate governance structure had hardly improved, and the intended increase in efficiency had failed to meet expectations because State-owned capital still dominated the ownership structure.
"The latest round of reform must focus on a withdrawal of State-owned capital from these banks and a sharp increase of private capital," he said. "It will improve the banks' efficiency, raise their expected value substantially and force them to become completely market-orientated."
Wen Bin, principal researcher at China Minsheng Banking Corp, said that the mixed-ownership reform was a crucial step, as the government would reduce its interference in the economy and allow the market to play a decisive role in the allocation of resources.
State-owned and private capital would have wider collaboration on equity and business. With other reforms, private and foreign capital would enhance the corporate governance structure of State-owned companies as well as provide checks and balances for their operation.
"Whether the mixed-ownership reform will succeed depends mainly on the determination and courage of the government," Wen said.
"It's very important that the government fully respects the thoughts of the diversified shareholders on corporate governance and a bank's daily operations, although a private company may not become a lender's largest shareholder."
Today, the government still plays a decisive role in the appointment of senior executives at State-owned banks.
Zeng Gang, director of banking research at the Chinese Academy of Social Sciences' Institute of Finance and Banking, said banks should increase the participation of private shareholders in the recruitment of senior executives and allow them to have a bigger say.
It is also important for the banks to explore a long-term incentive mechanism to unite their interests with that of senior executives and employees.
"By improving the corporate governance structure, State-owned banks aim to ensure long-term and stable development, rather than over-development over a short period," he said.
"This year, China's economy faces increased downward pressure, which demands higher standards for the banks' management and long-term stability.
"The mixed-ownership reform will be adjusted and improved step by step during its implementation process."
