Cover Editorial - EO print edition no. 473
Translated by Tang Xiangyang
Original article: [Chinese]

Last week, the Agricultural Bank of China (ABC) formally began down the path to be listed on the Shanghai and Hong Kong stock exchanges, a move that marks the final step in the reform of Chinese state-owned banks.

After the ABC dual-IPO is completed, all of China's five large state-owned commercial banks will be listed.

But we can't really say that this marks the completion of something but that it signals a new beginning of sorts

Reform of Chinese banks began in 1998, in the wake of the Asian Financial Crisis.

At that time, many abroad thought that that "China's state-owned banks were technically bankrupt" and there was great pressure on the banks to reform.

Since then, the Chinese government has spent huge amounts in reforming the banks.

In 1998, the Ministry of Finance provided the four largest state-owned commercial banks with a total of 270 billion yuan raised through the issuing of special government bonds; in 2000, China's four financial asset management companies took over 1.4 trillion yuan in bad loans from the four biggest state-owned banks; and starting from 2004, the State Council injected 45 billion US dollars of foreign reserves into the Bank of China and the Construction Bank of China, meanwhile, Central Huijin provided 15 billion yuan to the Industrial and Commercial Bank of China and encouraged the bank to seek foreign strategic investors.

Besides, the central government also offered the banks preferential tax policies so as to lessen the burden of branch closures and the laying off of employees.

The Construction Bank of China was listed in Hong Kong in 2005, followed by Bank of China, the Industrial and Commercial Bank of China, and the Communications Bank of China. Following their listings, the risk management of the banks has improved dramatically. For example, in the past, even a loan department director or a president of a banking branch was able to approve a loan project; but now there are loan review commissions that oversee the issuing of such loans, furthermore, both the categorization of loans and credit risk provisions have also greatly improved. The credit risk provision has gradually increased from less than 70 percent five years ago to100 percent, 120 percent or even 150 percent now.

Both the adequacy and quality of Chinese banks' capital funds are reaching their best levels in history. With capital adequacy ratios of 10 percent, some banks even reach 11 or 12 percent.

Some small and medium-sized banks even maintain their capital adequacy ratios at over 13%.

Judging from this year's first quarter profit reports, most of the 14 listed banks saw profits grow by around 40%.

All this testifies to the great success that Chinese banks have achieved through reform. But that's not to say, with the public listing of ABC that  reform has come to an end.

As a modern joint-stock bank, all the state-owned banks still have too many management problems that need to be solved.

During the financial crisis, the banks were encouraged by the central government to issue huge amounts of new loans to help stimulate the economy and they're still dealing with the difficulties of trying to recover from such a huge release of capital.

The capital adequacy ratios of the banks have obviously decreased, which has in turn led to a frenzied search for financing. Investors remain concerned over whether the banks can lead themselves to recovery and to deal with what will likely be a rapid rise in bad loans.