China must discipline bank managers responsible for the granting of bad loans, even though the banks involved are preparing for an initial public offering. If the problems are glossed over, those responsible may not only go unpunished, but also sneak into the top management of a restructured and listed bank.
The restructuring and listing of state-owned commercial banks were the most important issues for the business community during the National People's Congress and the Chinese People's Political Consultative Conference held this month. At the end of the meetings, Premier Wen Jiabao said that reforms must succeed and that the country would settle for nothing less than complete success. Liu Mingkang, chairman of the China Banking Regulatory Commission also made it clear that 'those people responsible for historical losses should not be allowed to walk away with no punishment'. Both these remarks were impressive and do much to support the reform process.
The Bank of China and China Construction Bank are busy with their preparations to go public. Although no timetable has been set, the bigger question is how they can achieve genuine corporate reform through the exercise. One important step the government has taken is the launching of a system of accountability in the course of the disposal of bad assets. Such a system has been absent in the past initial public offerings (IPOs) of large state-owned enterprises and banks. If honestly implemented, the new procedures would demonstrate that reformers are sincere in placing a higher priority on corporate restructuring than on the IPO itself.
The scandal surrounding Liu Jinbao, the disgraced former vice-chairman of the Bank of China, showed the importance of strengthening banks' internal controls and holding responsible those who issued problem loans. In the past, top bank officers were rarely, if ever, disciplined for huge losses incurred from bad loans, unless informers alerted the Communist Party's Discipline Department. Everyone responsible would be 'acquitted' and a large amount of bad assets written off in preparation for an IPO.
There were two reasons for this lax corporate control. First, people tended to attribute bad loans to external factors, such as unfavourable macroeconomic and market volatility.
Second, government regulators were afraid that publicly exposing too many instances of poor corporate control, especially by punishing those responsible, would taint the image of the companies involved. In other words, bad corporate governance was glossed over to ensure the success of the IPO.