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IPO Will Assist Overall Reform of Banking Sector
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By Ba Shusong

On July 5, when the Bank of China (BOC) launched its initial public offering (IPO) on the Shanghai Stock Exchange, the market reacted warmly and pushed its stock prices high above its original price.

BOC's listing on the A-share market has a significance that cannot be overstated.

The listing, coming soon after the government lifted its year-long ban on IPOs in May, is valuable both to the development of BOC and the overall fortunes of the domestic stock market.

Individual and institutional investors at home and abroad have carefully analyzed BOC's investment value, pointing to its numerous advantages, including a higher income from intermediary businesses than its competitors, as well as its long history as a well-known brand.

However, judged in terms of its business model, market competence and corporate governance, BOC differs little from other State-owned banks that have yet to go public or get listed on overseas capital markets.

Instead of simply buying BOC stocks, investors who purchase BOC shares are in fact trying to make inroads into China's banking industry.

A number of factors have attracted these investors China has a booming financial market and good economic prospects, while Chinese banks have an extensive network of branches and some have established strategic partnerships with strong allies.

On the whole, China's banking sector is very appealing.

This charm is mainly a result of government support, the ongoing reform of the financial sector, the Chinese economy's bright prospects and strict controls over entry to the banking sector.

It is this charm that results in the high value of bank shares, rather than the strengths of any particular bank.

Therefore, given the fact that BOC and several other lenders have gone public, it is time for them to find their own value.

To this end, banks should stop depending on external factors such as preferential policies and government support in the disposal of non-performing assets.

State-owned banks, including BOC, should instead take steps to improve their internal management and corporate governance.

When they become more profitable, these banks will turn themselves into more valuable assets on the capital market.

Although this task will not be an easy one, it is certain to pay rich dividends, and it is certain to change both the State-owned banks and the nation's banking industry.

As a matter of fact, BOC's advantages are not as solid as they appear to be in investors' analyses.

BOC admittedly has an edge over other banks in terms of trade and foreign exchange, but this edge simply comes from a specialization designated under the planned economy.

This specialization is now a source of great risks for BOC.

BOC's trade-related business is now a major source of its non-performing assets. Its heavy reliance on foreign exchange has also exposed BOC to huge risks in terms of exchange rate fluctuations.

And BOC's well-known network of overseas branches does not contribute much to its profits.

Apart from BOC Hong Kong, the only purpose most of these subordinate organizations serve is to publicize BOC in overseas markets.

BOC devoted a considerable part of its IPO prospectus to explaining the bank's frequent criminal cases in recent years. This indicates improved transparency.

These cases did not take place without good reason. BOC opened its renminbi retail business much later than other banks in China, making it less capable of controlling risks and finding its position in the market.

Even its great advantages in trade and foreign exchange are not insurmountable. For example, in Suzhou, Jiangsu Province, the Agricultural Bank of China has already beaten BOC in terms of foreign exchange business.

BOC's IPO on the Shanghai Stock Exchange was a milestone in the reform of State-owned banks. It also offers an important starting point.

BOC's IPO should not be regarded as an invitation for the public to share in its monopoly profits, but rather as a measure to encourage more investors to take part in the reform of China's financial sector.

Investors are encouraged to play their due role in supervising BOC's corporate governance, urging it to improve its management, enhance business transparency and increase its profitability.

The capital market is the engine propelling BOC towards further reform. It will no longer need governmental support to brighten up its balance sheets. Instead, it will gain profitability as it creates value for its clients. As a result, it will win increased value on the stock market.

In this process, BOC will be more efficient in the allocation of its resources, the banking industry will have improved risk controls, and the money the public entrusts to the financial sector will be better used.

As a result, BOC, the financial sector and the country all benefit. That is the target of reforming state-owned banks and it is also the incentive for financial reform.

Note: the author is deputy director of the Institute of Finance with the Development and Research Center under the State Council.

(China Daily July 12, 2006)

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