The China Banking Regulatory Commission (CBRC) said Monday it would take a prudent stance in approving new joint-stock banks, but would encourage private and foreign capital to buy into existing commercial banks.

The commission said in a statement that it has decided joint-stock commercial banks will be the direction of China's banking industry.

But "because establishing new Chinese-funded banking institutions will have a significant impact on China's existing banking industry and market, and given the fairly protrusive problem of banking industry risks and an exit mechanism for banking institutions that needs further improvement, the banking regulatory authority has been prudent in approving new joint-stock commercial banks," it said.

The statement was the banking watchdog's first formal clarification of its stance on the establishment of new joint-stock banks after Chinese media lavished coverage last year on some private companies' plans to set up the nation's first fully privately owned commercial banks and, more recently, reports on three new joint-stock commercial banks.

While keeping tight controls on setting up new shops, the CBRC said it encourages private as well as foreign investors to buy stakes in existing commercial banks.

"Generally, the China Banking Regulatory Commission encourages private and foreign capital to enter existing commercial banks and participate in the restructuring, reform and risk dissolution (of the banks), helping small- and medium-sized commercial banks to grow bigger and stronger," the statement said.

In China's banking system, small- and medium-sized commercial banks typically largely refer to the 11 joint-stock commercial banks, which operate on a nationwide basis, and the 112 regional lenders known as city commercial banks.

CBRC Chairman Liu Mingkang said earlier this year that his commission encourages foreign investors to also participate in the reform of the four State-owned commercial banks, which hold more than half of the nation's banking assets.

Qiu Zhaoxiang, dean of the School of Finance under the University of International Business and Economics, lauded the CBRC's stance in inviting both private and foreign capital in reforming the bad-loan-ridden banking sector.

"It's no controversy that the industry should be opened to private capital, but we also need to actively usher in foreign investors, especially those with modern financial institution management expertise as international strategic investors," he said.

"The method can not only diversify the shareholder structure, but can, by referring to foreign experience, help improve the property rights system and corporate governance," Qiu added.

Qiu urged caution in allowing private capital into the banking industry.

He said there are worries about the qualification of private Chinese entrepreneurs as bankers, and their strong desire for profits that may lead to greater risks.

Although private Chinese capital has a presence in the majority of the 112 city commercial banks, its biggest share in a nationwide commercial bank has long been only a little above 70 percent - in the China Minsheng Banking Corporation.

There has been no official account as to whether any of the five planned private banks, which prompted nationwide debate last year on whether solely privately owned banks should be allowed in China, has any hope of winning regulatory approval.

But the CBRC Monday listed six requirements for the Bohai Bank, a new joint-stock bank that has reportedly won approval from the State Council, the cabinet, and the Zhejiang Commercial Bank, which will emerge from a restructuring of existing financial institutions.

The new banks must have implemented corporate governance structures, be able to prevent illegitimate affiliated transactions, and have qualified foreign strategic investors among their initial shareholders.

In reforming city commercial banks, the commission said it would pick the bigger, better-performing ones for restructuring, and will allow them to "digest" historical burdens by means of re-capitalization and asset swaps, before they can usher in domestic private capital and foreign capital.

At the end of last year, China's 11 joint-stock commercial banks had an average capital adequacy ratio of 7.35 percent and a 6.5 percent non-performing loan ratio by the internationally accepted five category classification, the CBRC said.

The two figures stood at 6.13 percent and 12.85 percent respectively for all the city commercial banks.

(China Daily February 10, 2004)