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Regulator Ups Supervision of Pilot Banks

At a press conference held in Beijing Thursday morning, China Banking Regulatory Commission (CBRC) President Liu Mingkang said that the CBRC will closely supervise the pilot joint-stock reform of two major state-owned banks.


The Chinese government announced at the beginning of this year that it had injected US$45 billion from its forex reserve into the China Construction Bank and Bank of China, two of the Big Four state-owned banks, to bolster their capital adequacy ratios.


“The capital injection is actually a kind of investment, and 2004 is a critical time for the joint stock reforms of the two pilot banks,” Liu said.


“The CBRC will urge the two banks to strengthen their corporate governance, formulate business goals and strategies in line with the objective of reforms and proceed further with non-performing loan (NPL) disposal and portfolio restructuring in a follow-up to the capital injection.”


The goal of the pilot project is to transform the two state-owned banks to modern joint-stock commercial banks with adequate capital, sound management and international competitive ability in the next three years.


According to China’s WTO commitment, the financial sector will fully open to foreign investment in 2007, which will have an enormous impact on the domestic banking industry. Chinese banks, the Big Four in particular, are beset with such problems as low efficiency, low capital adequacy ratios and high NPL ratios.


The CBRC was established last April in order to strengthen supervision and regulation of financial institutions. Its basic hardware framework is now in place, including 36 banking supervision bureaus and 296 local offices.


Liu said that the banking authority has set 10 general corporate governance and internal control goals for the two pilot banks. These include improving governance, introducing foreign strategic investors, adopting prudent accounting rules, establishing a sound risk management system and implementing market-oriented operations.


The banking authority also set seven economic indicators -- those used by the world’s top 100 banks -- as benchmark criteria for assessing financial health. These include net return on assets (ROA), net return on equity (ROE), cost/revenue ratio, NPL ratio, capital adequacy ratio, largest exposure concentration and loss provisioning coverage ratio.


NPL ratios have been a source of headaches for Chinese banks for some time, but have improved overall since the CBRC was established. The Big Four in particular have shown improvement, and the NPL ratio for the two pilot banks has run at about 4 percent since the government’s capital injection.


“Their NPL ratio should be kept between 3 and 5 percent before 2007,” Liu said.


He noted that the two banks must set up a strict responsibility system and prevent possible moral hazards when disposing of NPLs.


Liu stated that the other two major state-owned banks, Industrial and Commercial Bank of China and Agricultural Bank of China, should also improve their risk-resistance mechanisms, strengthen management and form scientific development strategies.


(China.org.cn by staff reporter Tang Fuchun, March 12, 2004)

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