Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), took steps to calm fearful ABC officials by insisting that this – or any other plan for that matter – was still two years from reaching the table. The reason? ABC is in such dire shape, they haven’t figured out what to do about it yet.
Coming as Bank of China (BOC) sealed the fourth spot in the all-time IPO stakes with a US$11.2 billion offering in Hong Kong, before defying sluggish markets by rising 15.3% on its trading debut, this was no doubt a bitter pill for ABC bosses.
After all, BOC is in essence not that different a creature from its agriculturally-focused counterpart – it is a state-controlled lender making the painful transition from no-questions-asked source of funding for government-favored projects to responsible commercial entity.
From ABC’s point of view, BOC is just lucky enough to have had the bulk of its debts wiped out by the government – and to have been lending to sectors where credit calamities can largely be offset by success stories. As the bank of China’s rural classes, risky lending by ABC is less likely to pay off, while its balance sheet must be read with social as well as economic necessities in mind.
Fraught with fraud
Persuading lenders and borrowers to adjust to a responsible credit system isn’t easy and these banks will have their legs swept from under them every now and then by cases of fraud and corruption.
BOC aired its dirty laundry for all investors to see by devoting a full three pages of its IPO prospectus to the scandals that have blighted the bank’s past. Best to get these things out in the open, officials must have thought, although there are bound to be some who say three pages is insufficient for such juicy tales.
However, this "honesty is the best policy" approach didn’t account for continued dishonesty amongst officials within its ranks, however minor. The week before it debuted on the Hong Kong bourse, state media started reporting that a businessman had colluded with bank managers to embezzle US$18.2 million from a BOC branch in Henan province.
Apparently the scandal, involving improper bills of exchange, was reported to police as early as March. The slow progress indicates the trouble head office has controlling activities at the local level, where separate business dealings or political connections held by the conspirators in any offence can have a much stronger hold than orders issued from Beijing. BOC is not alone in encountering such problems.
In the last month, Bank of Communications, the country’s fifth-largest lender, has admitted that it is investigating a US$25 million graft case in a branch in Shenyang, Liaoning province. Shanghai Pudong Development Bank is looking into a US$50 million property loan fraud case at one of its branches.
The introduction of foreign strategic investors is supposed to help the banks instill greater discipline in their staff, ensuring they approach loan applications objectively and without thinking about under-the-table pay-offs. Royal Bank of Scotland (RBS) has seen its 5% stake in BOC double in value as a result of the strong IPO. It can be argued the presence of a successful financial player like RBS boosted investor confidence and therefore pushed the offering to heights it might not otherwise have reached.
Now, though, it is down to RBS to make good on its promises of assistance in corporate governance and risk management. It will do this, of course, as in return it can expect to use the BOC platform to market premium banking services to high-end Chinese clients. But there is a difference between theory and practice here – you can’t just attach Western solutions, or Western people, to the Chinese model.
BOC recruited Lonnie Dounn, an American who became known as "Dr No" for his uncompromising attitude towards lending while working at HSBC in the wake of the Asian financial crisis, as chief risk officer. The appointment was intended to send a message to investors ahead of the IPO that the bank wouldn’t repeat its earlier mistakes.
However, news of Dounn’s resignation emerged shortly before the listing. Personal reasons were cited and reports painted a picture of a man struggling to perform as he would like, hampered by having to use three full-time translators. With fears mounting that rapid loan growth will deliver a fresh army of defaulters, each of the Big Four needs careful stewardship. Foreign expertise is invaluable but this story only serves to illustrate that a few more steps are required to make it effective.
The phrase "a Chinese solution to a Chinese problem" becomes ever more hackneyed but, in terms of making banks responsible lenders, it has relevance. A balance-sheet hawk from the US must be supplemented by a bevy of pragmatic Chinese staff able to perform keyhole surgery at the local level, disentangling political interests from corporate ones.
Going public – and the level of disclosure involved in doing this – is ultimately the way forward for China’s banks. They have to be honest with their shareholders and this means individual branches must be forced to be honest with HQ. Similarly, the arrival of a strong BOC on a Shanghai bourse that has started to open its arms to IPOs once again, will serve to bolster the markets.
ABC aside, the restructuring of China’s financial sector is on course to be a success. Going forward, corporate accountability is the key.
Pigs or chickens?
China has gone too far with a controversial draft labor contracts law likely to be enshrined in legislation this summer. Among a raft of contentious clauses, the most worrying are those handing additional power to the labor unions.
China’s unions are a unique animal, with few parallels to unions created out of worker dissatisfaction in the West. They all ultimately answer to the All China Federation of Trade Unions (ACFTU), which has a primary constitutional responsibility to look at the overall economic interests of the Chinese state. Employee interests are a secondary priority.
It is not surprising that workers see it as feckless bureaucracy, looking after the needs of the pigs rather than the chickens, to paraphrase George Orwell. Poor working conditions and low wages have translated into social unrest and the emergence of a new breed of independent unions, such as those that have formed in southern China’s manufacturing heartland.
According to the AFL-CIO, Chinese workers have got a lot to complain about. The powerful US labor union filed a trade complaint last month asking US President George W. Bush to impose trade penalties against China on the grounds that authorities have helped Chinese companies reduce labor costs by at least 47% through suppressing strikes, barring independent unions and letting factories ignore laws on minimum wages and child labor.
As a result, not only did 26,700 Chinese workers die last year from industrial injuries and illnesses, the union said, but more than 400,000 factory jobs in the US have been lost.
The US union is not wrong. Chinese workers, particularly the millions of non-educated migrants who find work in Chinese factories, are powerless in China, not least because the laws meant to protect them are seldom enforced. Instead of enforcing these laws, China has rewritten the rule book.
The labor contracts law requires positive union involvement throughout the labor contract process, most notably through the requirement for unions to approve employee guidelines. Without a union, many day-to-day activities will be impossible.
Why is the government taking this path? First and foremost, it wants to bring the renegade independent unions under control.There is no way the profit potential of state-owned giants like Baosteel can be compromised by union demands. Primacy is to be restored to the government-oriented ACFTU by giving it more power.
This presents an interesting choice for foreign companies: do they accept the ACFTU or risk a potentially more worker-orientated independent union?
Either way, all paths lead back to Beijing. If passed, the new law will give China a stick with which to selectively beat up on foreign enterprises, while leaving local firms to continue as before. In the increasingly competitive post-WTO China, this stick will be a great leveller against smart new entrants from abroad.
Faced with such a situation, foreign companies will do well to ensure that the unions in their workplaces are as far removed from government influence as possible. Already far ahead of domestic competitors in terms of conditions and pay, taking the moral high-ground and supporting a union movement that truly represents workers interests is the best way to support Beijing’s worker generosity and undermine its self-serving ulterior motives.
Given a choice of backing the pigs or the chickens in a post-WTO world, employers must decide which lays the golden egg.