'The reform aims to turn the two selected banks into commercial banks. After the reform, the two banks would become modern companies featuring sufficient capital, strict internal controls, safe operations, good service and good economic returns.'
Xinhua
THERE IS NOTHING difficult about performing miracles, you see. Just inject US$45 billion into two banks, offer some of their shares to the gullible and you can perform the Lazarus trick too, as well as make those banks the very models of banking prudence and service.
Call it a miracle if you will. I call it Indonesia. Banks dominated the stock market there when I worked as an investment strategist making country selections and I had to keep an eye on them. The story was the same as it has been in the mainland - massive bad loans, corruption, regular state-led capital injections and bankers at a loss to know what they were doing in the straightjacket of a government imposed financial system. Listings on the stock market made things no better and the system collapsed in 1997. The basic problem for the mainland is that a true commercial bank can thrive only in a truly commercial financial system.
This means not only that bankers alone make the lending decisions and do so on the basis of proper risk analysis but that there is a true capital market. Depositors, lenders and borrowers must be free to put or find their money where they will at the interests rates they agree.
So tell me about the capital market in the mainland when the bulk of the money is still directed to and from state corporations at interest rates set by the state. How do you price capital, as you must do to operate a true commercial bank, when there is no capital market?
Competent bankers are not turned out at the end of an assembly line. It takes a long apprenticeship for people to learn the necessary skills in this business and, if it is to be done across an entire country, a large number of people need to learn those skills. We have reached that stage in Hong Kong but how many people have reached it in the mainland when banking has been a game of meeting deposit and lending targets with little or no attention paid to profitability?
