Regulators keep sharp eyes on pilot banks
(China Daily)
Updated: 2004-03-11 23:53

A top Chinese banking regulator Thursday unveiled measures to ensure the widely-watched pilot reforms of two State-owned banks proceed as planned, pledging efforts to prevent moral hazards.

At a joint press conference, Liu Mingkang, chairman of China Banking Regulatory Commission (CBRC), elaborated on an appraisal system for reform at the Bank of China and China Construction Bank, which were chosen late last year for pilot joint-stock restructuring and received a combined capital injection worth US$45 billion.

At the same news conference, Zhou Xiaochuan, governor of the People's Bank of China (PBOC), the central bank, ruled out the possibility of an interest rate hike this month, citing the lagged effects of last year's monetary policy actions.

"Having concrete targets now is surely an improvement," said Wang Yuanghong, a senior analyst with the State Information Centre (SIC), referring to the CBRC's appraisal system.

"Not only the pilot banks now have specific targets to pursue (in their reforms), it will also help hold senior bank executives accountable for their conduct," he added.

The CBRC has set targets using seven benchmark indicators, such as the net return on equity (ROE) and cost/revenue ratio, for the pilot banks to meet before 2007, Liu said.

The criteria were set in accordance with the average level of the world's top 100 banks.

The official also said a strict accountibility system will be established at the two banks to prevent moral hazards.

Bank officials responsible for losses will be held accountable and great efforts will be made to prevent new intentional defaults by borrowers, Liu said.

Last year's recapitalization, following one in 1998, aimed to boost the pilot banks' capital adequacy levels in preparation for initial public offerings, but Liu said there is no need for a further recapitalization, citing the feasibility studies and other options, like bond issuance, to boost their capital bases.

"We believe the two companies ... through their own efforts, will have a healthy development in the coming few years," he said.

Liu said the two pilot banks' non-performing loan ratios will both drop to around a healthy 4 per cent after the ongoing restructuring ends, but did not give a timetable.

The Bank of China said earlier it plans to reduce its bad loan ratio to 6 per cent at the end of this year, compared to 15.64 per cent at the end of January.

"That means the write-offs must be massive," said Yang Qingli, an analyst at CITIC Securities.

The pilot banks were reportedly allowed to use their old capital to write off part of their bad loans.

The CBRC's targets for the two banks are achievable, Yang said, as they are not too high when compared to foreign or even local counterparts.

Among others, the two are required to bring their ROE, a key indicator investors look at, up to 11 per cent by 2005 and 13 by 2007, which she noted is still lower than those reported by Pudong Development Bank and China Merchants Bank, both listed joint-stock lenders, last year.

Although the pilot banks have been using a huge part of their profits as loss provisions in recent years, the massive write-offs will enable them to set less of their profit aside for that purpose in the years ahead, she said.

"Possibly there will be no major difficulties (in achieving the targets)," Yang said.

Liu said new bad loans keep propping up at Chinese banks, especially as they expanded lending last year to sectors like real estate and auto.

The central PBOC tightened monetary policy last year, raising bank reserve requirements by 1 percentage point in an attempt to curb rapid credit and monetary growth. But Zhou, the governor, said Thursday the effect of policy actions is still to be seen.

"The reason we are not considering adjusting interest rates this month is that, although the consumer price index (CPI) is accelerating, it has not come to a level where we have to adjust them," he told reporters.

The central bank's open market operations, which were scaled up last year to mop up excessive liquidity, remain efficient in countering inflationary pressures at present, he said.

The prospect of an interest rate hike this year, said Wang Yuanhong at the SIC, largely depends on whether the CPI, which came in at 3.2 per cent in January, maintains its momentum in the coming months, and if the effect of last year's monetary policy actions, expected to become clear later this month and early next quarter, is strong enough.