Banking & Finance

Enter the Leviathan

The government wants to list Agricultural Bank of China

Enter the Leviathan

ABC: Dragged kicking and screaming towards an IPO?

At a time when some countries look to be nationalising their banking sectors, it is a welcome encouragement for the world’s remaining free marketeers that China is trying to do the opposite. It is ploughing ahead with the privatisation of its financial system.

The first round of privatisations took place in 2005 with the successful flotations of Bank of China, China Construction Bank and ICBC. These gargantuan listings triggered off a wave of reform as China’s banks sought to boost their profitability by introducing new concepts such as performance-related bonuses, and credit scoring.

Back then, most people thought that even privatising these banks was a feat comparable to moving Abu Simbel. But phase two is more jaw-droppingly pharaonic: the privatisation of Agricultural Bank of China (ABC).

ABC is no ordinary bank. In fact, ABC has always been regarded as something of a financial compost heap – its raison d’etre being to fertilise the countryside and promote Chinese agriculture. This has strained its balance sheet. As recently as 2007 its annual report was listing non-performing loans of a staggering Rmb817.9 billion ($119 billion) – an NPL ratio of 23.5%.

But as the building of the Great Wall suggests, the Chinese are rarely intimidated by projects of grand scale. And last month it was announced that ABC had been restructured into a joint stock company – in preparation for a potential listing in the second half of this year. To make this possible, ICBC’s Pan Gongsheng has been drafted in as ABC’s deputy president and given responsibility for the listing. A special asset management company has also been set up to take over Rmb800 billion of the NPLs and work them out over the next five years.

China’s copious foreign exchange reserves were also flushed into the mix, when their guardian, SAFE, injected Rmb130 billion into ABC. It took a 50% stake in return.

ABC’s business is focused on China’s poorest areas, and hence making a profit is tougher for it than for its more urban-focused peers. Its staff have also been more used to policy lending than sound lending, so retraining them is a challenge, especially when you bear in mind there are 450,000 employees.

But if ABC is going to focus on profits, who is going to undertake the vital task of policy lending in the countryside? In the last week of December, the 21CN Business Herald broke the news that a “huge financial giant” was emerging. Its name is China Post Savings Bank. With the largest number of branch offices of any entity in China (and therefore probably the world), the bank should have a huge “network advantage” says the paper. A key growth area for the postal bank is the wiring of monies from migrant workers back to their hometowns and villages.

But the bank has now been authorised to switch from its previous role of collecting savings and buying government bonds to instead focus on rural lending. It is reckoned that Rmb120 billion of new lending per year is planned.

At present China Post Savings Bank has no bad loans, but according to officials interviewed by the 21CN Business Herald that clean sheet may not last long. Most rural post offices only have three staff, and they all wear multiple hats. Who to empower to make loans and how to maintain checks and balances are problems worth thinking about, as the bank has no real experience in managing major credit risk.

Then again, nature abhors a vacuum, and so if one source of toxic rural lending must disappear, it seems logical for Post Savings Bank to step into the breach. If properly mismanaged, this could be the bad bank to end all bad banks.

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