OpinionSmall China banks envy big lenders' Hong Kong listings, move to emulate them

It is an all-too-familiar tale. A few big players in the mainland's banking sector reap the rewards of operating in an oligopoly until their success attracts attention from rivals.

Now a steady stream of small and medium-sized banks are planning to list on the Hong Kong stock market, although they will need to think carefully about differentiating their growth strategies at a time when mainland bank stocks are under pressure.

Among those that may list are Huishang Bank of Hefei, Anhui province, and Bank of Chongqing. They are now concentrating on managing their bad loans as they prepare their initial public offerings.

The preparation for listing ensures that the managers of the small lenders, many of whom simultaneously hold various positions in the Communist Party, focus on commercial performance.

Managers understand that if they wish to take their companies public, they must subject themselves and their corporate decisions to the scrutiny of regulators, analysts and shareholders.

A case in point was the dual listing in Shanghai and Hong Kong in 2010 of Agricultural Bank of China. About two years before the listing of the bank, one of the Big Four state-owned commercial lenders, it received a US$19 billion capital injection from Central Huijin Investment, a unit of sovereign wealth fund China Investment Corp, to clean up its non-performing loans and raise its capital adequacy ratio before shares were offered to foreign investors.

Agricultural Bank's asset quality improved substantially following the government-engineered disposal of 817 billion yuan (HK$1.03 trillion) of non-performing loans in 2008. But that move led some critics to argue that state-owned assets were being sold at distressed prices, creating the perception that badly managed state-owned companies could turn to the government for bailouts.