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Foreign investors not sole answer for Chinese banks

Foreign investors are making headlines by pouring huge sums of money into China's largest banks, but it remains to be seen whether it will help improve corporate governance in the sector, analysts say.

"It really takes a long time to make fundamental change," said May Yan, vice president and senior analyst with ratings agency Moody's Investors.

"Whether the banks eventually will be on the right track and will improve and become commercially viable entities -- that is something that we need to wait and see about," she said.

Royal Bank of Scotland Group PLC announced last week it is leading a consortium that will spend ?1.7 billion (US$3 billion) to buy a 10 percent stake in Bank of China (中國銀行), the nation's second largest lender.

The deal is the third in as many months between foreign and major state-owned banks, following pledges by Bank of America and Singapore's Temasek to buy large stakes in China Construction Bank(中國建設銀行), the industry's No. 3.

The multi-billion-dollar acquisitions are set to continue, as Beijing pushes banks to secure foreign strategic investors ahead of planned listings in coming years.

But lingering over past and future deals are the problems -- the big state-run banks have long had with corporate governance -- and with senior executives running afoul of the law.

Only days before Royal Bank of Scotland unveiled its deal, the former chief executive of Bank of China's Hong Kong operation was handed a suspended death sentence for graft.

"Eventually they need to improve their profitability to be able to absorb any economic, macro changes and, fundamentally, they need to improve their corporate governance," Yan said.

"But if you're talking about a bank with 14,000 branches around the country, it's not easy to implement," she said.

Despite all the risks, no major player in the global banking business denies the need to have a significant presence in China.

"Probably the only place in the world with this kind of growth in the next 10 to 20 years is China," said John Wadle, UBS regional banking analyst.

He said partnerships allow offshore banks to build their existing businesses, including trade financing, but the real lure is the potential for massive expansion in the underdeveloped retail banking and capital markets.

But for the Chinese banks to become competitive with the global leaders, they need to kick some bad habits.

These including excessive dependence on the state, which, backed by 1.3 billion taxpayers, has a virtually unlimited ability to shore up the banks with more funds.

The government has already injected US$22.5 billion each in Bank of China and China Construction Bank and US$15 billion into Industrial and Commercial Bank of China (中國工商銀行).

The government hopes to clean up their balance sheets before the sector opens up fully to foreign competition at the end of next year.

In doing so, it has lightened their burden of non-performing loans, accrued through years of government-directed lending decisions and mismanagement.

The results have been positive, according to Benny Zhang, an analyst with Asian Banker Research: "Last year, China's banks did really well ... They had very high net profit."

But given the massive infusions of government money into the banks, the improvements in the industry are somewhat artificial, according to analysts.

And until the link between government and banking sector is severed, it is a case of buyer beware for foreign banks seeking Chinese partners, they said.

"In general, our view of the Chinese banking sector is their stand-alone financial performances are relatively weak," Yan said. "We're waiting to see some sustainable improvement on the banks' side -- not from external intervention -- before we move on their ratings."
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