China: Reform of China's Largest State-Owned Bank

2005

Lynette Ong

On 21 April 2005, the Chinese central government injected US$15 billion into the Industrial and Commercial Bank (ICBC) - the country's single largest bank - in an effort to reduce its non-performing assets, in order to pave the way for the bank's increased market orientation and the much-speculated market debut. This wasn't the first attempt by the Chinese authority to clean up its moribund state banks, however this rescue effort has drawn considerable attention for two reasons.

First, the magnitude of rescue funds that the ICBC has received is much lower than the US$50 billion widely expected, and is also smaller than the US$45 billion that each of the other two state-owned banks - the Bank of China (BOC), and the Construction Bank of China (CCB) - that are in better financial positions have been given. Secondly and interestingly, are the source of funds and the manner in which they have been injected into the ICBC. After the fund injection, Huijin Inc. now becomes the majority shareholder of the other two state-owned banks, BOC and CCB. Huijin Inc. is an investment company that comes under the purview of the Central Bank, which has been set up to safeguard the value of the country's foreign exchange earnings. On the other hand, the funds poured into the ICBC came from Huijin Inc. and the Ministry of Finance, each contributing 124 billion yuan. As a result each holds a 50 per cent stake in the bank. Some observers suggest that the Ministry of Finance's involvement underlines the intention of the central government to retain control of the ICBC.

The sheer scale of the ICBC may explain why the government wants to retain its grip. At 2004 year-end, savings deposits at the ICBC accounted for 26.9 per cent of the total savings institutions, and 13.6 per cent of the country's GDP. By retaining majority government interests, unlike the other state-owned banks that are currently undergoing transformation, observers suggest that ICBC will be expected to continue to undertake some policy functions after the reform, that is, it will be expected to channel loans to government-designated sectors and to provide funds to government-approved projects.

WATCHPOINT: The next state-owned bank due for a government rescue package is the Agricultural Bank of China, which has traditionally been the state bank supporting the agricultural sector. What sort of reform blueprint will the Agricultural Bank adopt given the differing precedents?

 

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