Scandal won't shake confidence
( 2002-02-05 11:11 ) (2 )

The recent misconduct allegations involving one of China's mega State-owned commercial banks - Bank of China (BOC) - and the removal of BOC head Wang Xuebing should not severely shaken investor confidence in China's banking industry, said analysts with global investment banks.

Rather, the Chinese Government's determination to carry out reforms - as witnessed by how it handled the BOC case, and the introduction of a string of policies in the upcoming Central Financial Works Conference - will offset the negativity brought on by the scandal and help bolster confidence in the Chinese banking system and the overall economy, the analysts said.

The BOC's New York Branch was fined recently by the US Comptroller of the Currency and China's central bank over a series of misconduct allegations.

The allegations include giving preferential treatment to customers who had personal relationships with some members of the branch's prior management, large exposures to a single borrower, facilitation of loan fraud and fraudulent letter of credit schemes, officials said.

In addition, China's National Audit Office announced recently after investigating the bank's headquarters, seven provincial branches and more than 150 second-tier branches that the BOC is still suffering from poor asset quality and high expenses.

"This has stirred up anxiety among both the media and investors," said Huang Yiping, chief economist with the China area of global investment bank Salomon Smith Barney (SSB).

It shows that the banking problems are serious, the risks are high, and the transition of Chinese institutions in recent years likely made them susceptible to corruption, Huang said in his recent research report.

The scandals also signal the need for a reassessment of bank risks, he said.

Although the central bank said the non-performing asset ratio in China's State-owned commercial banks stands at 26.6 per cent, Huang estimated it at 30 per cent.

However, Huang said he also interpreted the public revelation of the BOC scandals as a sign of the government's determination to tackle long-term banking problems.

He said that forthcoming attitude is partly driven by the upcoming opening up of the financial markets now that the country has joined the World Trade Organization (WTO).

Huang's view was echoed by John Llewellyn, global chief economist with US-based investment bank Lehman Brothers.

''Any transitional economy is plagued with problems, and there is no case in the world in which the reform process goes smoothly,'' Llewellyn said at a conference last week.

He said it is encouraging that China is addressing the bank non-performing asset issues. Otherwise, such problems would inhibit yearly growth, he said.

SSB's Huang said that China is on the eve of major financial reform and that the Central Financial Works Conference scheduled for February 5-7 will decide on reform policies in almost all major areas of the financial sector for the next five to 10 years.

Huang said he expects a series of policy changes in the banking sector. For instance, the banks will likely be allowed to issue subordinate bonds to raise capital; a three-step reform approach consisting of internal reform, corporatization and public listing will likely be adopted; and reforms of the interest rate and exchange rate systems will likely be accelerated.

"It's hard to predict the exact outcome of the policy conference, but we think the new policies adopted should help address the problems revealed during the recent scandals," he said.

China's banking sector is also stepping up reforms.

BOC officials were recently quoted as saying that the bank has completed preparatory work for its three overseas regional auditing centres, which supervise the work of the bank's overseas branches.

BOC President Liu Mingkang also said the bank is working on a risk-control committee and a duty-fulfillment investigation group to strength internal control.