Last week was a confidence-booster within Chinese state banking circles. On June 23, Swiss financial giant UBS AG announced that it may invest US$500 million in the Bank of China (BOC). The next day, Singapore's Temasek inked a deal with the government-owned Central Huijin Investment Company to buy 5.1 per cent of its shares in the China Construction Bank (CCB), for an estimated US$1.4 billion.
Those deals came after the Bank of America agreed to buy a share of about 9 per cent in CCB. These are among the first batch of international strategic investments in China's biggest state-owned banks. Mainland banking regulators are breathing a sigh of relief and patting themselves on the back for taking an impressive first step towards reform.
But their ebullience would seem premature. On the contrary, the pressure to reform internally - in large part as a result of these deals - should now be much greater. Regulators and bank officials are bound to feel the heat very soon.
Recently, strategic investors have been known to buy stakes in initial public offerings (IPOs) of Chinese state-owned banks. But these were mostly for very small stakes and with hardly any serious intention of long-term investing.
The recent spate of activity, however, is for real. HSBC's investment last August in the Bank of Communications, and the latest deal between the Bank of America and CCB, were planned long before the IPO process began. The two banks also paid much larger sums for considerable stakes in the Chinese banks, with well-designed arrangements to increase their stakes and rights in the future. These are the types of investments that make sense in reforming China's state-owned commercial banks.
Most of all, these injections make it imperative for the BOC and CCB to improve their corporate governance structure. Of course, the state is still their majority stakeholder, and this is bound to be a problem. But now that foreign investors have thrown in big bucks, they will have to answer to their own shareholders and make sure their investments pay off. That should pressure the BOC and CCB to prioritise certain reforms - including delegating clear powers and responsibilities to their boards of directors, and building sound management-incentive mechanisms.