Op/Ed piece on Chinese bank management and the need for real
privatization makes two main points: Firstly, still
operating according to SOE practices and culture, Chinese banks are
hardly "managed" in the normal sense of the term.
Rather, they are objects of what might be crudely described as plunder
by managers and staff. Secondly, only real privatization
will change this situation.
Asian Wall Street Journal, November 25, 2002
STEPHEN M. HARNER
If you ask a Chinese banker the
main problem with his bank, and he is in the mood to be frank, he is
likely to say it is ownership. By this he will mean that the bank is
government-owned, in other words it is a state-owned enterprise. Today
all banks in China are SOEs, with the sole exception of foreign banks
and perhaps one small listed bank, Minsheng Bank.
The perverse effects of state
ownership have been widely documented elsewhere. But the case of the
Chinese banking sector is of particular interest because it demonstrates
the problems inherent in "market socialism" -- the model which
the Communist Party ostensibly still espouses -- and why other sectors
of the Chinese economy, lacking a steady stream of deposits and vigorous
protectionism, have found this model to be unsustainable.
As in the Soviet Union, state
ownership in China has nurtured a culture where the dominant objective,
embraced by management and staff, is crudely but accurately described as
plunder. In this culture, no decision is taken, no initiative is
launched, no transaction is closed, no products are bought or sold,
without a calculation at all levels of the concomitant benefit that will
flow to the individual. This ethos is so pervasive and fundamental that
it effectively drives operational management of all Chinese SOEs, the
Observers have long been puzzled by
the extreme decentralization of the management of Chinese banks, with
branches, sub-branches and even lower units operating virtually
autonomously. Provincial branch managers are capable of making large
investments, drafting policies and developing systems with hardly any
need to notify their head offices.
The reality is that the banks, as
with the remaining SOEs in other sectors of the Chinese economy, operate
on a "contractor basis" between a head office whose
responsibilities are largely confined to administrative work and
quasi-independent operational units. The head offices do not produce
detailed operating budgets, product strategies or quarterly reporting
requirements, but a limited number of annual bottom-line targets and
quotas. Delivering the quota numbers is usually all that is required
from branch managers to keep head office satisfied, allowing the
managers to use the resources under their control to pursue brazenly
These circumstances explain why
China's banks seem uniquely prone to pillaging by senior managers, as in
the $483 million theft case at Bank of China's Kaiping branch, and to
the kind of bank official-customer complicity in fraud that was recently
exposed in the Bank of China's operations in the U.S. But such blatant
theft is still the exception. More common, indeed universal, is the
situation of bank managers and staff taking advantage of the absence of
budgets or cost controls to effectively expropriate bank property and
funds from state shareholders.
A small but telling example is seen
in one of the larger city commercial banks. This bank's head office
authorized its branches to independently conclude agent sales agreements
with insurance companies. The branches did so and simply divided the
cash commissions among the managers and staff. No one at the head office
felt compelled to stop this, no doubt because similar arrangements
permeate the organization, up to the head office level. There is strong
resistance to increasing transparency and accountability through the
introduction of budgets and management information systems, as this
would tend to circumscribe these practices.
For managers in the branches the
current laxity provides scope for building up off-the-books "little
treasure chests." These are funds under the control of branch
management, often of the branch manager alone.
As in other SOEs, these constitute
an indispensable tool for greasing relationships with individuals inside
and outside the bank.
It is an interesting paradox that
the internal controls in China's banks -- in the sense of the number of
signatures required to authorize a transaction -- are in most case more
elaborate than in foreign banks. But, in practice, managers and staff
cooperate to narrow the scope and depth of these controls.
Is there a way out for China's SOE
banks and their owner, the state? The People's Bank of China, the
central bank, is offering a quick-fix solution in the form of recently
promulgated, highly detailed operational-management guidelines for
commercial banks. The guidelines direct banks to establish management
information systems, budgetary management systems and reporting
requirements, and to enforce management discipline throughout their
gigantic organizations. But these are only guidelines, with no specific
deadlines or penalties for non-compliance. Given the SOE culture and
disincentives to good management built into the current system, little
progress can be expected.
In a fundamental sense there is
just one way forward for Chinese banks: privatization. Only by placing
ownership in non-state hands can the culture and incentives within
Chinese banks be changed so that the management ethic becomes capital
creation rather than plunder.
Is China's bank regulator, the PBOC,
prepared to accept privatization? One reason for optimism is a
recognition of the urgent need to recapitalize China's banking system.
Indeed, if a recent PBOC directive is to be implemented, requiring banks
to take reserves against and write-off non-performing loans by 2005, the
amount of new capital needed will be in the hundreds of billions of
dollars, far beyond the capacity or interest of the state. On a
political level, the signs are also promising. Staff in state banks have
been told that one of the key themes of the 16th party congress is
"min jin, guo tui" -- the entry of private interests,
and the exit of the state.
Nonetheless the signals from the
PBOC have so far been mixed at best. The central bank has signaled it is
willing to allow private domestic investors to take majority interests
in China's 108 city commercial banks, although foreign investors are
still subject to a 15% ceiling. But for the 10 shareholder banks,
including such names as CITIC Industrial Bank and China Merchants Bank,
the PBOC appears to prefer partial privatization, through the public
listing of 20% to 30% of shares, while restricting foreign direct equity
investment to 15% or less, as in the case of Citibank and Shanghai
Pudong Development Bank.
This approach, the dominant and
frequently disastrous model for listing other SOEs in China, falls well
short of effective privatization, leaving the previous management in
place and control firmly in the hands of state interests. It remains to
be seen whether Newbridge Capital of the U.S. will obtain PBOC approval
for its plans to acquire 20% of Shenzhen Development Bank, so breaking
through the 15% ceiling on foreign investors. But even if it manages to
do so, with a 20% stake, or indeed anything less than 50% control, it is
hard to see how the benefits of privatization can be realized.
Nor is privatization on the cards
for China's big four SOE banks, although the Bank of China has listed a
minority of shares in Hong Kong and the China Construction Bank hopes to
list domestically within four years. But such partial listings will not
substantially alter these banks' character, and for this reason, their
management problems will remain largely intractable.
It may seem paradoxical, but for
seasoned foreign bankers in China this prospect is not particularly
welcome. They understand that -- whatever the commitments made as part
of China's entry into the World Trade Organization -- the effective
opening of China's banking market will not be allowed until domestic
banks are ready to compete. A slow improvement in the internal
operations of local banks means an extended wait for foreigners. But
that is what will happen unless China is prepared to embrace the only
solution to its banking problem -- privatization.
Mr. Harner is president of
S.M. Harner and Company, a Shanghai-based financial industry
consultancy, and author of "China's New Political Economy" (Westview
Updated November 25, 2002