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To: RealMuLan who wrote (26523)	3/29/2005 2:32:54 PM
From: RealMuLan	Respond to of 116555

China's banking system has made only patchy progress Published: March 28 2005 22:17 \| Last updated: March 28 2005 22:17 In the early 1990s the Bank of China, one of the country's “big four” banks, made an error in my favour amounting to hundreds of US dollars. When I pointed out the mistake, the bank declined to take the money back. Instead, I was sent from one slow-moving queue to another at the bank's main Beijing branch, by tellers anxious to avoid the task of sorting out the fouled-up transfer. When I told the third cashier that I had had enough and was going home, she said that she appreciated my good intentions but there was nothing she could do. The experience left me with a deep impression of just how dysfunctional China's biggest financial institutions could be. A decade of reform efforts later, and with Bank of China (BoC) and its “big four” peer, China Construction Bank (CCB), preparing for multibillion dollar international initial public offerings, the banking system today remains deeply confused. At least that is the lesson from recent events. Since January, Chinese authorities have been trying to find a manager of a BoC sub-branch in the north-eastern city of Harbin accused of involvement in embezzling up to Rmb1bn ($120m). This month Zhang Enzhao, chairman of CCB, resigned amid corruption allegations. Since September 2004, more than 50 CCB staff have been accused of financial offences. These are not isolated incidents and Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China are considered to be in even worse shape. Just this week, for example, regulators accused dozens of staff at two Agricultural Bank sub-branches in Inner Mongolia of making illegal loans and other abuses involving nearly Rmb115m. To cite such cases is not to deny that China's banks have made huge progress. The BoC branch where I had to queue a decade ago was dingy, badly organised and full of surly and conspicuously under-employed staff. These days such flagship branches boast bright decor, ticket-queuing and comfortable chairs that show the new importance attached to service. ATMs are common and internet services increasingly popular. Balance sheets also look better. BoC's non-performing loan ratio fell to about 5.1 per cent at the end of last year from more than 16 per cent just a year before. CCB's non-performing loans are even lower at 3.7 per cent, and both have capital adequacy ratios above the benchmark 8 per cent. However, much of the improvement is cosmetic, the result of debt transfers to state-owned asset management corporations and infusions of public funds such as the $45bn pumped into BoC and CCB in 2003. Stronger balance sheets make it easier to attract foreign strategic investors and IPO subscribers but do not fix banks' corporate culture, governance or leadership. Beijing knows that, of course. Indeed, officials see international listings as a way to improve oversight and attract expertise. Even Wen Jiabao, the premier, stresses the need for better bank accounting and more transparency. The energetic China Banking Regulatory Commission issues reams of guidelines laying out what lenders must do to improve internal controls and risk management. And the big banks have officially been liberated from state interference in lending and given greater freedom to vary interest rates. Such reforms should allow the banks to shed their role as tools of economic central planning and operate as true commercial entities. But they also bring risks: a rush into consumer lending, for example, brings new scope for misjudgment and abuse, with reports of people successfully applying for dozens of mortgages or car loans. Executives at BoC talk with great self-satisfaction about the progress they are making in reorganising staff and strengthening controls. But the scandal in Harbin suggests progress is patchy. The government's instinct to control the banks may also conflict with their need for commercial independence. CCB's Mr Zhang was quickly replaced by Guo Shuqing, a central bank vice-governor. All of which strongly suggests that foreign investors should think twice before putting their money in BoC or CCB. While strategic investors in China's smaller state-owned banks can at least hope to play a transformative role, the scale of the “big four” creates both a management minefield and an intrinsic moral hazard. The recent scandals also have policy implications. Fixing China's banks, which account for more than 60 per cent of financial system assets, is vital to continued development. Nobody doubts that injections of public funds are needed. But policymakers should make bail-outs contingent on reform: giving a badly run bank more capital makes it more dangerous, not less. The scale of the challenge was brought home to me on a personal level last year, when I tried to withdraw Rmb2,000 from an ATM at a branch of ICBC, China's biggest bank. ICBC is next in line for an infusion of state funds, and most of the time serves me reasonably well. But I became concerned when the ATM appeared to count my cash but then refused to deliver it. Staff at first insisted the transaction had been cancelled, but eventually confirmed the money had been taken from my account and promised to pay it back. Indeed, it became clear that I was only the latest of a series of customers to complain about the malfunctioning machine. But when I asked why the ATM had not been shut down, the manager on duty waved the suggestion aside. “It works some of the time,” she said. The writer is a correspondent in the FT's Beijing bureau news.ft.com