"China's Century of Change" - Part 5: China Is Banking On Help Beyond Its Borders
Friday, July 01, 2005SUSIE GHARIB: There has been a lot of news lately about China's bidding for U.S. assets, like CNOOC's play for Unocal. But Americans and Europeans are also bidding for Chinese assets, and one type of asset in particular: banks. As we wrap up our special series "China's Century of Change," we look at how outsiders are playing a crucial role in reforming China's banking system. Darren Gersh reports.
GERSH: It's 9:00 a.m. at the Bank of China's headquarters in Beijing, time to greet the customers. For the employees, this is an old routine. It's the new one that is causing anxiety. China's second largest bank is restructuring from top to bottom.
ZHU MIN, EXECUTIVE ASSISTANT PRESIDENT, BANK OF CHINA:I can tell you, it was pretty messy and pretty nervous on people.
GERSH: They're nervous because all of the bank's 230,000 employees must reapply for their jobs. Bank of China is still state owned, but it gave up its legal status as a government department and officially became a corporation last year. Now it is teaching its employees the language of the marketplace: job evaluations, pay-for- performance and employment contracts. Zhu Min is in charge of the restructuring.
ZHU: It's a big shock, absolutely a big shock. They never experienced that. But the good news is that people realize number one, it is a good thing for the bank. And number two, they realize it's a trend, so we have to go through the whole thing.
GERSH: So far the number of top-level managers has been cut from 816 to 200. The bank is also cleaning up its balance sheet, selling off $40 billion in bad loans and it is trying to find out who made those bad loans, disciplining 20,000 employees in the process.
ZHU: That's quite a lot. The reason is also very simple. The reason is we want to build a culture and a sense of responsibility.
GERSH: The government here hopes to make the Bank of China a showcase of reform, but the rest of the banking system has a long way to go. China may have the skyscrapers of a modern economy, but its banking system is still a relic of central planning. Private forecasts figure that half the loans on the books of Chinese banks are bad and even official statistics show that China's banks are technically insolvent. If economic growth falters, some fear China's banking system could collapse. The four biggest state-owned banks control more than half of the country's bank assets and for decades they made loans to fit state policies, not market realities.
TRANSLATION OF: CHEN XIWEN, VICE PRES., DEVELOPMENT RESEARCH CENTER OF THE STATE COUNCIL: The main problem is that the ownership of Chinese banks is very concentrated, mainly state-owned, since China has been under a planned economy for a very long time. The internal management is relatively loose because of the lack of competition.
GERSH: Tales of corruption are pouring out. In March, the chairman of China construction bank resigned for allegedly taking bribes. And early this year, employees at a small bank of China branch embezzled $100 million. Zhu says that prompted a massive review by pricewaterhousecoopers and a renewed focus on compliance.
ZHU: What we found is that our weakness was internal control, but overall the system is quite OK. We didn't find very much fraud cases.
GERSH: And Zhu says corporate governance reforms continue. Bank of China has drafted top level international bankers onto its board, but it is still unclear how much control over the banking system the government is willing to give up.
NICHOLAS LARDY, CHINA ANALYST, INSTITUTE FOR INTERNATIONAL ECONOMICS: The organization department of the party is still in the driver's seat in terms of deciding who is going to be the chairman or the president, or the top officers of all these state-owned financial institutions.
GERSH: Even so, foreign banks are lining up to buy a stake in one of the fastest growing economies in the world. In mid-June, Bank of America announced it would put up $3 billion for a stake in China construction bank. And Swiss Bank UBS recently confirmed talks to invest more than $1/2 billion in Bank of China. A Bank of China IPO is slated for next year. Chinese bankers say the foreign expertise and cash will prepare them for 2007, when China pledges to open its banking system to foreign competition.
ZHU: At that time, every Chinese bank will have foreign partners competing with every foreign banks with Chinese partners.
GERSH: Still, banking reform is perhaps the toughest challenge facing China's economy. With a weak stock market, banks are the main source of new investment. And new loans are growing so fast, some worry the $700 billion mountain of bad loans will grow even larger.
LARDY: Bad loans get piled on in adverse circumstances. New loans, when you are in a boom period as we are now in China, they're not really tested.
GERSH: For now, banks are rolling in cash. With no social safety net to fall back on, the Chinese save an astounding 40 percent of their incomes. And the government is injecting more money into the system, including $22 billion for the Bank of China. Zhu says the government has proven its commitment to reform and he discounts predictions of a banking crisis.
ZHU: The good news is we know where we are, I think is number one and we know where we will go.
GERSH: But there is one place China will not go. Analysts say, until the country's banking system is stronger, it provides Chinese leaders with yet another reason not to give in to pressure to freely float the yuan. If depositors were given a choice, the fear is they would pull their money out of the country, further weakening the weakest link in the Chinese economy. Darren Gersh, NIGHTLY BUSINESS REPORT, Beijing.
