The ABC's of ABC reform

The third national financial work conference set the key tone for the shareholding reform of Agricultural Bank of China (ABC), the only unreformed among China's four largest state-owned commercial banks.

Premier Wen said that the shareholding reform of the ABC will be pushed forward in a smooth and steady manner, and the bank would continue to act as a major financial service provider for farmers, agriculture and rural areas. He also said that the bank should continue to serve the agricultural sector, rural areas and farmers, based on its capital and network advantages in the counties.

The ABC plans to be listed as a whole company, instead of being split into a group of provincial-level banks. "The shareholding reform of the ABC is rather complicated and may take a relatively long time to carry out full reform and make market listing preparations," said a senior official with the People's Bank of China.

China started reform of its four largest state-owned commercial banks after the first national financial work conference in 1997. China Construction Bank took the lead, getting listed in October 2005, followed by the Bank of China last year. The Industrial and Commercial Bank of China staged a dual debut in both Hong Kong and Shanghai bourses on October 27 last year.

It's generally believed that the ABC will follow the restructuring steps of the other three large commercial banks. The restructuring areas include government capital investment, non-performing loans, establishing shareholding companies, introducing strategic investors and seeking opportunities for listing.

The ABC is widely deemed to be the worst hit by massive lending to the rural sector, and up to $70 billion would be needed to clear the bank's non-performing loans before it could meet overseas listing standards, according to analysts.

The ABC's third quarter report of 2006 said that it had cleared away 7.82 billion yuan of outstanding bad loans in the first nine months. The bank's bad loan ratio dropped by 2.68 percentage points to 23.49 percent in September and its operating profits rose by 34.85 percent to 42.57 billion yuan in the first nine months.

During the course to prepare for the restructuring, the bank has completed internal and external auditing, set up an accounting supervision and control center and started a personnel resources reform scheme.

Speed up bond market growth

China would speed up the growth of the bond market by expanding the size of corporate bonds, said Wen at the financial work conference.

China's securities regulator will likely take over issuing corporate bonds soon from the nation's top economic planner, a move to bolster the largely neglected equity bourse-based bond market, industry insiders said.

China saw the issuance of 45 corporate bonds last year, raising a record of 101.5 billion yuan for Chinese companies, up 55 percent from the previous year.

The China Securities Regulatory Commission (CSRC) is set to shoulder the responsibility for overseeing debt sales and trading of incorporated enterprises, which include all domestically listed firms.

Currently, corporate bond issuance must be approved by the National Development and Reform Commission (NDRC), which sets the quotas each year. The central bank sets limits on the coupons of the debt. The bond also has to obtain approval for listing from the CSRC and the bourse.

After the change, the NDRC will still take charge of debt flotation of some large state-owned enterprises that have yet to be restructured into shareholding ventures, according to a report of China Business News.

"It would likely mean a revival of the stock exchange-based bond market, which has dwindled in recent years, especially in comparison with the dynamic inter-bank market," said Stephen Green, a senior economist at Standard Chartered Bank.

Analysts and market insiders expect the CSRC not to maintain the current quota system, which lets the government decide the amount of funds companies can raise through debt sales.

Instead, the stock regulator may work to streamline the issuance process by adopting a reporting system similar to that employed in the central bank's bill market.