China announced a US$45 billion plan yesterday to turn two major state-owned banks into free-standing corporations -- a step meant to create profitable competitors as Beijing prepares to open its financial markets to foreign rivals.
The money will go to replenishing the capital of Bank of China and the China Construction Bank, state media said. Like other Chinese state banks, the two are struggling under a mountain of bad loans to state companies that have depleted their assets.
The banks are to be turned into corporations with shareholders and boards of directors, said the Xinhua News Agency and newspapers. They said "foreign strategic investors" would be invited in, but gave no indication that private investors might be allowed to buy control of the institutions.
The communist government has said it plans to turn major state-owned companies into such free-standing, profit-driven corporations. But the government says it plans to retain a controlling stake -- how much isn't clear -- in companies in finance and other "strategic industries."
Money to recapitalize Bank of China and the Construction Bank is to come from China's foreign reserves, which total nearly US$400 billion, the reports said.
"The reform aims to turn the two selected banks into commercial banks in the real sense," Xinhua said. It said they would become "modern banking companies, featuring sufficient capital, strict internal control, safe operations, good service and good economic returns."
China's state banks until recently were treated as a source of money to prop up failing government companies, leaving them with too little capital to meet regulator requirements.
Efforts to reform the industry have taken on added urgency as China prepares to meet commitments to the WTO to open its financial markets to foreign competitors by 2006.
A handful of smaller Chinese banks have formed ventures with US, European and other partners, benefiting from access to investment capital and more advanced banking skills.
Bank of China and Construction Bank will be required to reorganize financially, speed up disposal of bad assets and increase their capital reserves, according to Xinhua and major newspapers.
China's banking regulator announced a plan in December for a pilot effort to recapitalize major state banks, but didn't say which would be first.
That came five years after the Ministry of Finance injected 270 billion yuan (US$32 billion) into state banks in an effort -- later judged incomplete -- to restore their balance sheets.
A spokesman for China's foreign exchange regulator was cited by Xinhua as saying the injection of money into the two banks is a "kind of capital investment," not a subsidy.
Xinhua warned that bank officials might be punished for allowing nonperforming loans to pile up, "as will those who have tried to evade repayment of loans by fraudulent means."
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