Message hasn't got to Gansu

Poor governance accounts for much of the risk that plagues China's banks. In the past, provincial branches were frequently managed by local government officials, whose lending decisions were aimed more at supporting insolvent state enterprises to preserve jobs than at earning a commercial return.

As a result, the mainland's huge state banks came to resemble loose federations of local lenders rather than the national economic monoliths. Loyalty to senior executives in Beijing was sketchy and directives from headquarters were often ignored.

That history is causing problems today. In a report published last month, the Organisation for Economic Co-operation and Development (OECD) described a 'governance vacuum' within the country's big state banks.

'Even on the simplest organisational level, the giants lack the basic attributes of profit-making banks,' the report warned, explaining that the Big Four state banks were still required to allocate credit in support of policy objectives rather than in pursuit of commercial gain.

Consider the Industrial and Commercial Bank of China, the largest of the Big Four by assets. The president's latest annual report is peppered with reassuring buzzwords and phrases.

The bank has 'strengthened internal control and risk management frameworks' and 'enhanced credit risk management ... strengthening centralised credit line review, group exposure review mechanisms and authorisation management'.

Unfortunately, however, this message does not seem to have penetrated as far as the northwestern province of Gansu. In contrast to the bank's Beijing-based president, the mission statement of ICBC's Gansu branch proudly proclaimed the bank 'will actively carry out the requirement of Gansu provincial party committee'.

In Gansu, at least, governance reform still has a long way to go. Introducing foreign shareholders may help, but the OECD is sceptical, questioning whether reform can ever succeed while the state retains its controlling shares in China's banks.