What mainland banks require most is a radical overhaul of their management systems, a meeting of banking representatives was told in Beijing. 'Chinese banks need a massive injection of competence. How about a merger between the Construction Bank and Bank of America? We need a bold approach,' said Gordian Gaeta, vice-president of international consultants Booz, Allen and Hamilton. Mr Gaeta's comments were one of the many bright moments in what could easily have been a soporific session of the annual China Business Summit, on modernising mainland banks. The audience was in a bullish mood after a lunch speech by People's Bank of China governor Dai Xianglong on his ambitious plans to overhaul the country's weak banking system. After listening to Mr Dai, an articulate and humorous speaker who said non-performing loans accounted for just 6 to 7 per cent of total bank loans, you could be forgiven for thinking the moment was ripe to invest in some Chinese bank bonds. The good mood persisted through the first speech, by Zhu Min, senior adviser to the Bank of China, the most foreign-oriented and profitable of the country's big four state banks. Speaking in English and quick to admit the bank's shortcomings, Mr Zhu gave a breakdown of how it was changing to become a modern, global bank, spending US$200 million last year on information technology and adopting international norms that classified loans into five categories. But Mr Gaeta brought us back to earth. He said the incremental approach was too slow and would take 15 years, far too long when global banking was changing beyond recognition. He said the future of banking was in non-banking, referring to the rapid improvements in efficiency as Western banks offered a range of financial services, while Beijing separated banking from trusts, investment and securities. He proposed mainland banks list on international capital markets, in part to raise money but more importantly to submit themselves to the chilly discipline and sharp learning curve of the markets. Worse was to come, in the form of Nicholas Lardy, a senior fellow at the Brookings Institute. Except for the Bank of China, the leading Chinese banks were weaker than others in East Asia, he said. Their return on assets has fallen in the past decade, their capital adequacy has declined, with no new capital injections except this year, their reserves are very small and the proportion of non-performing loans has increased in recent years to average 25 per cent. Their cost structure is the highest in the world. There is no significant competition, which is the objective of the reform. They are greatly over-taxed. Hold it - do we want those bank bonds after all? Mr Lardy proposed a one-time, large-scale recapitalisation, saying the 270 billion yuan (about HK$251.26 million) in special bonds which the big four banks were to buy from the Ministry of Finance were grossly inadequate. To promote competition, he proposed restructuring the large banks, closing many of their small sub-branches, expanding the 12 new small commercial banks and opening the yuan market wider to foreign banks. Next to speak was Thomas Macy, chairman of the financial services practice of Price Waterhouse in China, with 5.5 years of experience working with Chinese banks. Management was the key issue. They needed modern managers who could operate in a competitive environment and better credit management, he said. While praising Bank of China for investing in information technology, he said Citicorp and JP Morgan spent five times that sum each year and that mainland banks already were far behind their international competitors in terms of technology. After hearing all this, who wants those bank bonds? Christian Murck, chief representative in Beijing for Chase Manhattan Bank, answered the question. He said that, despite everything, his bank would continue to rate the four leading banks as sovereign risk. There was public confidence in them. There would not be a run on the banks. The mainland had a good policy team, was determined to move ahead and was lucky. During the financial crisis, it had been saved by the lack of convertibility of its currency, the fact its stock markets had only slight exposure to foreign capital and its good foreign debt structure and high forex reserves. The mainland had a window of opportunity to address the weaknesses described by the speakers and clean up its banks before the next crisis, when its financial system might be so integrated into the global system that it no longer enjoyed the immunity it had this time.
