Central bank chief seeks break-up of Agricultural Bank
Weakest of the Big Four wants equal treatment and a listing in Hong Kong
The central bank chief has proposed dismantling the Agricultural Bank of China, the weakest of the big four state banks, but the lender is fiercely opposed to the idea and wants to list in Hong Kong.
After two years of bitter debate, Zhou Xiaochuan earlier this month made two proposals to the State Council for reforming the Agricultural Bank, which has the largest debts of the big four.
One involves restructuring it in the same way as the other three and preparing it for listing in Hong Kong and the mainland. The other involves abolishing the Beijing headquarters and putting its branches under the control of their respective urban and provincial governments, turning it into a large number of local banks.
To help these banks start with a clean slate, the provincial and central governments would take over its bad debts, estimated at between US$60 billion and US$70 billion, equal to the total of the other three big state banks - China Construction Bank, Bank of China and Industrial and Commercial Bank of China.
Mr Zhou has concluded that Agricultural Bank's debts are too big and that the bank cannot be reformed. Splitting it into small units would involve closing the Beijing head office and sending its staff to the local branches or making them redundant.
The China Business Post at the weekend reported that the State Council was most likely to accept the dismantling proposal. Agricultural Bank officials were unavailable for comment.
Last Thursday the bank issued poor results for last year, with net income down to 1.04 billion yuan from two billion yuan in 2004, net interest income down 21 per cent to 43.7 billion yuan and provisions against non-performing loans up 47 per cent to 34.6 billion yuan.
Its non-performing loan ratio was 26.17 per cent at the end of last year, down from 26.7 per cent a year ago.
The bank, which holds 12 per cent of China's US$4.7 trillion banking assets, has the worst asset quality and largest number of employees of the Big Four - 500,000 in 28,234 outlets, mainly in rural areas.
Mr Zhou's proposal has shocked the Beijing headquarters, which is fiercely resisting it, arguing that its high level of bad debt is a result of faithfully implementing government policy over the past 50 years, especially to rural co-operatives and town and village enterprises. It is the prime lender to China's 800 million farmers, the poorest and worst protected segment of the population.
It is arguing for equal treatment with the other three banks - an injection of state capital and restructuring into a shareholding group, leading to a listing in Hong Kong and possibly the mainland.
Until now, Beijing has refused the bank's request to provide funds until it has decided on a restructuring plan and because it fears that the bank is too corrupt and inefficient to make good use of new capital. Since 2003, Beijing has injected US$60 billion into the other three commercial banks and sold stakes to foreign strategic investors.
Brokers say that even in the current China fever, it would be hard to sell shares in Agricultural Bank due to its size, poor quality of management, high non-performing loan ratio and concentration on the rural market, the least profitable sector of the economy.