Share and Share Alike

By+Wang+Jun

The mixed-ownership reform of Chinas state-owned banks has recently been stepped up. Bank of Communications， the countrys fifth largest lender， said in July that it is studying plans to deepen its mixed-ownership structure， a move that may introduce more private and foreign investment into the statecontrolled bank.

The senior management of Bank of China said at the announcement of its interim results in mid-August that the bank will engage in active exploration of the opportunities opened up by the mixed-ownership reform.

In early August， the Chinese Government approved a revamp of the ownership structure of China Everbright Group， a core state-owned enterprise operating in such businesses as banking， securities， insurance and investment management. The revamp will transform the group into a joint stock company， a corporate structure that makes it easier to add new investors and is essential to going public.

In the securities industry， Anhui Guoyuan Holding （Group） Co. Ltd.， a state-owned controller of Guoyuan Securities Co. Ltd.， is planning to introduce private investment. China Huarong Asset Management Co. Ltd. has also introduced seven strategic investors and is actively exploring its options under the ownership reform.

Much at stake

“Large banks and insurance companies have all gone public after joint stock reform and are already mixed-ownership companies in the strict definition of the term， but they are still overwhelmingly controlled by state capital resulting in the serious problems endemic to monopolized operations，” said Mei Xingbao， an external supervisor of Bank of China， adding that to advance the mixed-ownership reform in the financial sector， the country should nominate two large banks， a large insurance company and a state-controlled securities company for experimentation.

When talking about the mixed-ownership reform in the financial sector， Ma Weihua， former President of China Merchants Bank， once said， “In the four largest state-controlled banks， the control of state capital is still strict and a full complement of incentive and restraint mechanisms are sorely lacking.”

Lian Ping， chief economist of Bank of Communications， thinks that although all the commercial banks have adopted a joint-stock structure， few of them have realized effective mixed ownership. In terms of shareholding structure， a mixed ownership should be composed of a diverse range of shareholders， but currently state capital controls too high a proportion of shares in some state-controlled banks， which are still far from possessing a true mixed-ownership structure.

Industrial insiders think an important step for the mixed-ownership reform would be to improve corporate governance through readjustment of shareholding structures. Li Jiange， Chairman of Shenyin and Wanguo Securities Co. Ltd.， said in the four largest state-owned banks， mixed ownership has not yet really been established.

In spite of the fact that the prices of bank stocks remain stagnant， Central Huijin Investment Ltd.， a state-owned investment company with authorization by the State Council to invest in major Chinese state-owned financial enterprises， has increased shareholdings in state-controlled banks.

Moreover， most city commercial banks are actually controlled by local governments. Private shareholders do not have much of a say in the decision-making processes of these banks. In recent years， city commercial banks have become virtual cash machines for local governments seeking funding for infrastructure projects and corporate financing.

Niu Ximing， President of Bank of Communications， thinks that at the level of corporate governance， the mixed-ownership reform must improve on the conventional model of corporate governance， which consists of a general meeting of shareholders， board of directors， board of supervisors and senior management， by establishing a mechanism whereby the board of directors and senior management operate independently but maintain oversight over one another. This would ensure that the board of directors plays a major role in strategic management， management of senior officials， reward management and risk control.

In its July announcement， Bank of Communications claimed it is conducting feasibility studies in respect of the furtherance of its mixed-ownership reform and the improvement of its corporate governance system， so as to push forward the overall reform of the bank， strengthen the mechanisms of risk control and accountability and simulate the institutions overall vitality and competitiveness.

Unifying stock incentives

Mixed-ownership reform is included in the Decision on Some Major Issues Concerning Comprehensively Deepening the Reform adopted at the Third Plenary Session of the 18th Central Committee of the Communist Party of China， which vows to vigorously pursue the development of a mixed economy and allows mixed enterprises to implement employee stock ownership plans to form communities of capital owners and laborers.

As Chinas financial sector developed， the problem of monopoly and issues related to the corporate governance of the banking industry affected the sectors efficiency. In July 2011， the China Banking Regulatory Commission （CBRC） began to allow commercial banks to formulate their own middle- and long-term stock incentive plans in accordance with relevant state laws and regulations.

Shang Fulin， Chairman of the CBRC， said that by now， 80-90 percent of commercial banks have completed their joint-stock reform. They must now focus on the area of corporate governance to improve their system of checks and balances， ensure more reasonable and stable business operations and decision making and explore avenues for establishing middleand long-term stock incentive plans.

Encouraging private capital

In the past decade， foreign financial institutions such as Goldman Sachs， Citigroup Inc.， Morgan Stanley， UBS AG and the Royal Bank of Scotland Group PLC had invested heavily in Chinas major state-owned commercial banks as strategic investors. But following Bank of America selling all its shares of China Construction Bank in September 2013， they all have withdrawn from Chinese banks.

Its widely considered that foreign investors may have left owing to their concerns regarding debt risks in Chinese banks， and it may also be the case that the Chinese banking sector was overseas investors destination of choice for arbitrage. “In the past， we thought foreign financial institutions were strategic investors， but Im afraid its not that simple. Their investments are more for arbitrage purposes rather than long-term strategic investment，” an anonymous analyst from one of the four largest state-owned banks told Economic Information Daily.

Now， supervisory authorities are roundly encouraging financial institutions to introduce investment so as to change their stockholding structure， under the auspices of the mixed-ownership reform. Zhou Yanli， Vice Chairman of the Chinese Insurance Regulatory Commission （CIRC）， stated the insurance industry will improve corporate governance and step up market-oriented reform， be more open to domestic and foreign investors and encourage private investors to participate in the reform of state-owned insurance companies. The CIRC is set to support development of insurance companies with mixed ownership.

The China Securities Regulatory Commission has also vowed to support the establishment of securities companies by private investors， professionals and other qualified investors， and to relax access to domestic securities companies by foreign investors. It will encourage securities companies and asset management companies in instigating mixed-ownership reform， and allow state-owned and collectively-owned capital， and private and individual investors to enter the futures industry， thereby effecting mixed-ownership reform in the sector.

“Mixed-ownership reform in the financial sector involves many issues， as opposed to merely representing reorganization of shareholding structures. The stake state capital enjoys can be reduced to allow more private capitals， but what is more important is that private investors should have more power in the decision-making process，” Guo Tianyong， a professor with the School of Finance at the Central University of Finance and Economics， told Economic Information Daily.