China Construction Bank next big SOE to embrace reform

2015010816:47

The second-largest lender on the mainland says it will look into mixed ownership under reform push that will lead to better governance.

The mainland's biggest banks might have been the most diligent students last year. Or at least, that is the claim.

China Construction Bank Corp chairman Wang Hongzhang last month told a financial newspaper the bank was studying "mixed ownership" reform, or state divestment.
That makes the lender, the mainland's second-largest by assets, the latest major state-owned enterprise to signal it would fall in line with the reforms being pushed by Communist Party general secretary Xi Jinping.

In July, Shanghai-based Bank of Communications also said it was "actively researching" mixed-ownership reform.

The banks' attendance in Xi's classroom for reform has not yielded results yet. Other state players, such as Citic Group and Sinopec Corp, made visible progress in lessening the state's stake in operations last year. Still, experts are trying to separate the substance from the tall talk and pinpoint where real reform - like a shake-up to party appointments for top executives - might take hold in the state sector in the coming year.

One model has already emerged in Citic's back-door listing through subsidiary Citic Pacific in August. Citic Pacific bought its parent firm for US$37 billion and issued US$6.8 billion in new shares. In doing so, all the assets of the biggest state conglomerate were listed, offering a window into its operations and casting a light on the firm's management.

"You can't evaluate management unless all of the firm's assets are listed," said Ivan Chung, a senior vice-president at Moody's Investors Service, noting the ease with which bad managerial decisions could be hidden in the unlisted assets of a parent company. "Any other way, the management will always look good."

As if to confirm Citic's plan as a framework for reform, the State Council in August approved No2 conglomerate China Everbright Group to transition to a joint-stock company.

The share of non-state investors was actually reduced to about 7 per cent in the Citic deal, reducing investor pressure on the management, critics said. Still, Chung said the full listing was a point from which real management reform could spark.

Taking a shot at the management of state firms is the real prize to be won in reform. It is also the most elusive.

Decades of so-called reform have passed but the governance of the companies still ultimately answers to the party. In fact, they are the party. An executive position at a state firm is often equivalent to a high-ranking government position. Successful government officials jump into top company roles before appearing once again as civil servants.

The system has found critics among investors and industry watchers. It is why many have scoffed at the employee stock incentives that several state firms rolled out last year alongside rumours that some banks, including Construction Bank, could cut executive pay by up to half.

The reforms at state financial institutions are real. A shake-up to the management system might not be, said Cheung Kong Graduate School of Business professor Li Xiaoyang.

The mainland's financial institutions faced real challenges last year, when interim profit growth halved for some players and bad debt grew by about 50 per cent for others. The outlook for this year is grimmer.

The essence of reform for the finance industry, Li said, was to securitise the illiquid assets dragging on performance, while also expanding the financial remit of the companies.

Take, for example, the mainland's premier bad bank, China Cinda Asset Management, which listed in Hong Kong in December 2013 and largely traded in its original bad-loan business for other financial services such as broking and refinancing bad loans.

This year, major partnerships with technology firms could be seen in order to spur innovation at clunky financial giants, Li said.

"Improving corporate governance is second place to that," at least at the biggest companies, he said.

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