A top Chinese banking official has given the go-ahead for the nation's largest state-owned banks to seek strategic investors from overseas in reforming the nation's banking system.

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), told China Daily in an exclusive interview that once the nation's state-owned commercial banks have conditions in place for restructuring or issuing stocks, the central government will encourage them to accept overseas funding as well as domestic capital.

Liu said the government would "especially usher in foreign companies as strategic investors."

China expects overseas capital to help its banks enhance their fiscal strength, improve capital structure, optimize corporate governance, and accelerate their interface with international markets to incorporate management practices and concepts, the leader of the Chinese banking industry watchdog said.

A few weeks earlier, Liu proclaimed the State Council, the Chinese cabinet, had approved a reform plan for the banking industry's Big Four the Industrial and Commercial Bank of China (ICBC), the Bank of China (BOC), the Agricultural Bank of China and the China Construction Bank, and said it would pick "one or two" of them for pilot reforms.

Areas covered by the reform plan include joint-stock restructuring, further reduction in non-performing loans, recapitalization, taking in strategic investors, and public stock offerings.

For 2004, Liu said, the CBRC will endeavor to help the State Council choose the State-owned commercial banks in proper condition to attempt pilot joint-stock reform programs, and to speed up the disposal of non-performing assets following market economy practices.

It will also urge state-owned commercial banks to actively explore the possibility of ushering in overseas strategic investors, optimizing corporate governance and enhancing internal control reforms, improving financial performance and strengthening international competitiveness. That will occur while the State will arrange capital replenishments in appropriate ways, he said.

In a late development, the State Council said Tuesday it had chosen the Bank of China and China Construction Bank for pilot joint-stock restructuring and had infused a total of US$45 billion into the two to boost their capital adequacy ratios.

Rumors had swirled about the much-anticipated reforms. Late last year, unconfirmed reports said two of the Big Four would list on the Hong Kong stock exchange as early as this year.

Since its establishment last April, CBRC has been working hard to quicken reforms of the nation's banking industry. Last September, it started to lead an investigation the largest ever of commercial banks

Implementation of five-category classification, and their non-loan assets and off-balance-sheet operations.

Among other problems, inspectors have found some banks were not strict with implementing the five-category classification, cases of inaccurate classification, insufficient post-lending management and weak supervision of lendings to affiliated companies, Liu said.

In the area of non-loan assets, a chronic lack of regulation has led to various irregularities, including unauthorized acceptance of properties as repayment of debts, postponement in the disposal of mortgages and negligent supervision.

The official also noted the potential risk is particularly threatening in off-balance-sheet irregularities in areas like guarantee, commercial bill discounting and issuance of letters of credit.

(China Daily January 7, 2004)