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Bank of China to Sell Shares in 2005 Associated Press
BEIJING - The Bank of China, one of China's four major state-owned commercial banks, plans to sell its first shares to private investors in 2005, the official Xinhua News Agency on Friday quoted its president as saying.
The announcement of a date for the bank's stock market debut comes four weeks after China announced a $45 billion plan to overhaul the Bank of China and another state bank in preparation for turning them into free-standing, profit-driven corporations.
The bank is "in no hurry to list" shares on a stock exchange until it finishes an overhaul meant to modernize its operations, Xinhua said, citing president Xiao Gang. The report didn't say on which exchange the bank would issue shares.
China is racing to strengthen its state-run banks and financial industries as it prepares to meet a commitment to the World Trade Organization to open its markets to richer, more sophisticated foreign competitors by 2006.
The government says it will use $45 billion from its foreign reserves to shore up the balance sheets of Bank of China and Construction Bank of China. The other two more financially troubled major state commercial banks - Communications Bank of China and Agricultural Bank of China - are expected to get similar injections of money later.
China's banks are trying to clear away a mountain of bad loans after decades of politically dictated lending to unprofitable state companies left them with depleted capital.
In exchange for the new money, the government says Bank of China and Construction Bank are required to speed up reforms aimed at increasing their profitability and creating new consumer services.
Bank of China said its profits rose 9.11 percent last year to 57 billion yuan ($6.9 billion). Foreign experts say that figure would be much lower if more demanding international accounting standards were applied.
China's banking system a ticking time bomb
By Lynette Ong
China's banking system is like a ticking time bomb. Saddled by mountains of bad loans and insufficient capital base, collapse of the state banks will cause an implosion of the Middle Kingdom, predict many doomsayers. Many say time is running out as foreign competitors are slated to pry open the banking sector in 2006, as China pledged to open up the sector as part of its commitment to the World Trade Organization (WTO).
However, whether or not foreigners are allowed to compete is beside the point - as any trade bureaucrat will tell you, there is more than one way to dodge WTO obligations. The key issue: if unreformed, the ailing state banks will indeed drag the Middle Kingdom down.
Two of the four state-owned banks, the Bank of China and the China Construction Bank, have each received US$22.5 billion to plug the massive holes in their capital bases. The $45 billion (373 billion yuan) cash infusion by the government comes from the country's foreign-exchange reserves, which topped $448 billion at the end of 2003, the world's second-largest, thanks to the surge of "hot money" flowing into China from speculators eager to profit from a revaluation of the yuan.
These two banks are widely expected to be floated on the stock market in the next one to two years. The recent move represents a government's attempt to "dress them up", making them appeal to potential investors.
The initial public offering (IPO) is expected to raise $5 billion to $6 billion for the government. While raising capital may be the intention of most owners of private companies when they go for an IPO, this isn't what the Chinese government wants most. The authority is hoping that by floating them on the stock market, the market and the new shareholders will discipline the banks, and that will make them run like "real commercial banks".
There is little "market discipline" in the banks' lending - many of the loans are state-directed to support the faltering state-owned enterprises that hemorrhage millions of dollars every year; while shying away from private enterprises, often small and medium-sized, which are rapidly growing and creating jobs for the economy. Starved of seed capital, these entrepreneurs often have to rely on savings from families and relatives, or turn to underground creditors who charge exorbitant interest rates. Lack of access to the capital market is a major impediment to the mushrooming of these private enterprises.
Why the Bank of China and China Construction Bank?
These two banks appear to be the best in the barrel of rotten apples. Traditionally each of the four state banks has its own specialized role: the Bank of China provides trade finance for dealings with foreign companies; the China Construction Bank provides funds for construction and fixed-asset investment; while the other two - the Agricultural Bank of China and the Industrial and Commercial Bank of China - specialize in agricultural lending and working capital loans to state industrial enterprises, respectively. Their market niches come as a blessing for the Bank of China and the China Construction Bank - trade financing and housing loans are growing far more swiftly than credit to rural enterprises or state-owned industrial companies, which are the turfs of the other two state-owned banks.
Against the backdrop of a rapidly expanding economy, the Bank of China managed to trim its non-performing-loan ratio to just under 18 percent at the end of October last year, and the China Construction Bank to 11 percent. So far, the Bank of China is the only bank with a capital adequacy ratio over 8 percent, which is the minimum required by the Basel Accord, an international convention on banking standards.
Both banks also appear to be profitable. In the first three quarters of last year, the Bank of China and the China Construction Bank were reported to be making pre-tax profits of 20 billion yuan ($2.4 billion) and 9 billion yuan ($1.08 billion) respectively. Though these figures have been adjusted for bad loans, many observers still question the ways in which loans are classified in the Chinese banking system. But this hasn't stopped big investment bankers from eagerly queuing up to advise them on their forthcoming market debut. The Bank of China also saw the oversaw the public listing of its Hong Kong unit two years ago.
Is $45 billion going to solve the problem?
Restructuring the bad debt is indeed critical in for the banks to carry on. Taken together, the non-performing-loan ratios of the four state-owned banks range from 22 percent to 40-50 percent, depending on whether one trusts the numbers produced by the China Statistical Bureau or independent credit analysts. They are technically insolvent by any standard.
However, by cleaning up the balance sheets or listing them on the stock market, the government is only treating symptoms of the problem and not addressing its root cause, which is poor corporate governance. After all, this isn't the first bailout the banks have received - the last two totaling 1.7 trillion yuan ($205 billion) were handed out in 1998 and 1999. Why would it be any different this time?
The state banks still suffer from poor corporate governance. There is no independent management committee, board of directors or supervisory council that create checks and balances on those key power holders or curb the use of power for personal gains. There is also inadequate internal control mechanism to regulate the flow of funds against misappropriation. Bank managers face an inadequate reward system, which often means they have to resort to kickbacks and bribes to supplement their paltry officially sanctioned salaries.
In such an environment, it is not difficult to conceive why a bank manager would not keep rolling out loans to state-owned enterprises, even though they are fully aware there is little prospect of recovering the loans. In fact, it is well known in China that bank managers have a disincentive for lending to private enterprises because they could lose their jobs if a loan to a private company goes under, but not if it's a state-owned firm. It is commonplace in China for mayors or party officials get top appointments in banks as a retirement package.
It is this entanglement of politics and finance that makes reforms of the banking and the state enterprise systems an extremely arduous task for the policymakers. Writing off bad loans or an IPO isn't going to untie the knot if the banks are not forced to confront the fundamental problem.
Lynette Ong, an economist by training, is a long-term observer of the Chinese economy. She is working on her doctoral thesis on the political economy of China's rural financial reforms. She writes from China and the Australian city of Canberra. She can be contacted at LHLO@lycos.com.
(Copyright 2004 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)
Almost 80% of all gold in the market goes into jewelry. The biggest consumer is India, where gifts of gold are common in weddings. The average Indian wedding uses over 2 pounds of gold.
Indian demand dropped over 20% in 2002 as the world economy took a hit. But India's economy is rising again. Indian demand pushed overall third-quarter consumer demand 5%, according to GFMS Ltd.
Asia consumes half the world's gold, and that may grow. Asian economies are getting stronger. China is easing restrictions on trading gold. And the weak dollar makes gold less expensive in Asian currencies.
