The "big four" Chinese commercial banks are seeking to lower their bad debt ratio among other reform measures to sharpen their competitive edge against foreign counterparts exploring the domestic market.

Starting from early this month, foreign banks are allowed by the Chinese government to do RMB yuan business in four more cities, Jinan, Fuzhou, Chengdu and Chongqing, bringing to 13 the total number of Chinese cities open to them.

And beginning December 31, the China Banking Regulatory Commission (CBRC) will put into effect a new regulation that allows a single foreign financial institution to hold as much as a 20% stake in a Chinese bank.

Foreign banks can compete with domestic operations in all places and business scopes in China in 2006 in accordance with China's pledges when it joined the World Trade Organization.

The "big four" -- the Industrial and Commercial Bank of China, the Bank of China, the China Construction Bank, and the Agricultural Bank of China -- were forced to take active measures to enhance their competitiveness, focusing on reducing their average non-performing loan (NPL) ratio to less than 15% by 2005.

The four banks now hold more than 65% of domestic market shares. China has an additional 11 joint-stock commercial banks, more than 100 city commercial banks and thousands of rural credit cooperatives.

Four financial asset management companies were established in 1999 to manage as much as 1.4 trillion yuan (US$168 billion) of bad debts from the state-owned commercial banks by sales, regrouping and debts-to-shares transfer. Of the figure, 415 billion yuan (US$50 billion) had been disposed of by the end of September.

Outstanding NPLs of the "big four" still reached 2 trillion yuan (US$240 billion) by the end of September, representing an average NPL ratio of 21.38 % in line with an international loan classification practice, dropping by 4.83% from at the year start. The China Construction Bank reported the best asset quality with a ratio of 11.84% at the end of October.

The CBRC demanded that state-owned banks take further action to dispose of the NPLs, prevent the re-accumulation of NPLs, control rigidly the quality of new loans, set special plans for bad debt canceling in key industries and areas, and explore new ways to dispose of NPLs.

A source said that the Industrial and Commercial Bank of China (ICBC) is applying to issue bonds guaranteed by 3 billion yuan (US$361 million) of bad debts to increase the liquidity of banking assets.

CBRC Chairman Liu Mingkang said that to bring down the NPL ratio is, however, just the first of a new round of three-step reform of state-owned commercial banks.

The second step is to inject capital into the "big four" through various channels and the third is to upgrade the banks, he said at a press conference earlier this month.

Although a clear timetable is not yet available, the four banks all hope to be listed in the stock market to collect funds and deepen reform. The Bank of China is widely anticipated to take the lead, since it is the only one where the capital adequacy ratio reaches 8 percent, the international requirement for commercial banks.

Central bank authorities and financial experts have emphasized repeatedly the necessity of injecting capital into state-owned banks. China used to do so by issuing treasury bonds.

"If we replenish the capital of state-owned commercial banks, we should require them to manage in line with market principles and strengthen their inner controls and risk mitigation," said a senior official of the central bank.

Director Zhan Xiangyang of the ICBC Research Institute told Xinhua that she believed the priority of state-owned bank reform is to establish efficient corporate governance. "Otherwise, new bad debts will occur after old ones are solved, and old problems will reappear."

China's "big four" have already sacked a large number of employees in an effort to streamline staff and raise efficiency in recent years.

(China Daily December 19, 2003)