China Moves toward Bank Reform, but Corruption Is Slowing the Pace
Engen, John, American Banker
HONG KONG -- To foreigners, the domestic banking scene in China can look more like the wild West than the Far East - complete with lynchings, boom-and-bust speculation, and institutions teetering on the edge of insolvency.
The march toward a decentralized, market-oriented system holds great promise. But in the short term, it has left regulatory holes that some bankers have sought to exploit through fraud, speculation, or embezzlement.
"This has always been a very concentrated system, where a lot of micro-decisions have filtered up to 10 guys in Beijing," says Harry Wilkinson, regional manager for Chemical Bank. "Now the economy is more complex and the power more disbursed. They haven't found the balance yet."
Off with Their Heads
When he took the reins as governor of China's central bank last summer, Vice Premier Zhu Rongji warned that bankers who had taken advantage of the looser regulations accompanying reform would have their "heads chopped off."
He wasn't kidding. Within two months, nine Chinese bankers were executed for embezzling or. accepting bribes.
But the reforms are about more than symbolic executions. Before they are through, Chinese leaden hope to revamp foreign exchange, commercialize stateowned banks and create a true central bank.
For American bankers, the pace of change will likely dictate just how quickly they can get a bigger piece of the world's biggest emerging market.
Run on Currency Feared
"The Chinese are very afraid that if foreign banks are allowed to do renminbi [local currency] business before they are ready, there will be a speculative run. So they are waiting," explains Tsang Shu-ki, a senior lecturer and banking expert at Hong Kong Baptist College.
Foreign bankers are drooling over one major reform goal in particular: Convertibility of the renminbi, which will allow them to participate more fully in the country's economic explosion. Today, they can do business only in foreign currency.
More significant for the average Chinese banker are plans to turn the nation's largest banks into commercial ones, while modernizing cash clearing systems. The ultimate goal: to create a financial system that can channel liquidity to sectors that truly merit it.
So-called policy loans - essentially government-mandated subsidies for money-losing government projects, such as revamping an old coal mine or steel plant - are being shifted away from regular banks to newly formed development banks.
Toward a Central Bank
At the same time, the People's Bank of China, once the nation's only bank, is taking on the role of a true central bank, and will use modern-day tools to control the economy. It will be aided by a new federal value-added tax, which should help replenish depleted government coffers.
Such shifts will likely create opportunities for foreign banks that can help in areas such as cash management and electronic banking.
"If somebody can create a system that helps them with circulation and liquidity, they can make a lot of money," says Antony Leung, North Asia investment bank head for Citibank.
But the process - one in a number of broad reforms - is being played out against a backdrop of rising social tension and disparity, Which promises to make the reform journey a bumpy one.
"People in China will tell you it will take five or 10 years to commercialize the banks. But I think it's more a question of how many decades," says Richard Mounce, general manager for Chase Manhattan Bank.
As reform began, branches of the four big state-owned banks - known as "specialized banks" - were given more autonomy in lending decisions. …