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The Listing of Chinese State-Owned Banks and their Path to Banking and Ownership Reform

  • Paul B. McGuinness and Kevin Keasey

China's leading state-owned banks have undergone radical transformation in recent years, with six of the country's top seven players listed in both Hong Kong and Shanghai. We first consider how the banks were reorganized for initial public offering, in terms of the removal of non-performing loans and the massive recapitalization of their balance sheets. Second, and more importantly, we consider whether they have been able to retain market share, further commercialize and enhance overall financial positions post-listing. Through in-depth case analysis of the six state-owned banks, we show that post-initial public offering they have significantly improved profitability, loan book size, loan book quality and capital reserve protection. However, we caution that the debilitating effects of the global credit crunch may slow or even arrest further progress across these dimensions in the near term. We conclude that China's leading banks have benefited materially from their transition, and have accordingly developed a range of competitive and co-operative strategies not only to sustain domestic market advantage but also to penetrate overseas markets.

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1 LeeMaster, T., “BOC prices stock below top in ‘goodwill gesture’,” South China Morning Post, 25 May 2006, p. B1.

2 LeeMaster, T., “ICBC on track to raise a record $22 billion,” South China Morning Post, 20 October 2006, News, p. 1.

3 Jia, C., “The effect of ownership on the prudential behavior of banks – the case of China,” Journal of Banking and Finance, Vol. 33, No. 1 (2009), pp. 7787.

4 Notwithstanding this point, Baradwaj, B. G., Flaherty, S. and Li, J., “Are Chinese banks positioned to compete in the post-WTO environment,” The Chinese Economy, Vol. 41, No. 2 (2008), pp. 5675 compare the top-4 Chinese banks with their US counterparts over 2001–05. They remark that, “Chinese banking reforms started in 1998 have achieved moderate success in preparing the Chinese banks to enter the international arena” (p. 56).

5 BOCOM Prospectus: Bank of Communications Co., Limited, Global Offering, 13 June 2005, at, p. 61.

6 See BOCOM Prospectus, p. 87.

7 See pp. 75–76 of the CCB Prospectus: China Construction Bank Corporation, Global Offering, 14 October 2005, at The NPL rate was further squeezed by a 2003 year-end “write-off” of nearly 60 billion yuan.

8 China Merchants Bank Prospectus: China Merchants Bank Co. Limited, Global Offering, 8 September 2006 at

9 CITIC Bank Prospectus: China CITIC Bank Corporation Limited, Global Offering, Hong Kong, 16 April 2007, at

10 On this theme, Hawes, C. and Chiu, T., “Foreign strategic investors in the Chinese business market: cultural shift or business as usual?Banking & Finance Law Review, Vol. 22, No. 2 (2006), pp. 203–37 provide a cautionary note for strategic foreign investors: “There is little evidence … that Chinese banks will be allowed to relinquish … broader ‘social responsibilities with Chinese characteristics’ in order to improve their bottom-line” (p. 236, quotations marks shown as reported).

11 China SAFE Investments now serves as a subsidiary of the CIC sovereign fund. See Hua, Thao, “Chinese action offers promise for US firms,” Pensions and Investments, 17 September 2007, p. 1.

12 La Porta, R., Lopez-de-Silanes, F. and Shleifer, A., “Government ownership of banks,” The Journal of Finance, Vol. 57, No. 1 (2002), pp. 265301.

13 See Concepion, J., “GITIC may owe more than $19B,” Hong Kong Standard, 10 October 1998.

14 T. Birtch and P. B. McGuinness, “The role of international strategic investors in the listing of mainland Chinese state-owned enterprises,” unpublished manuscript, March 2005, indicate the importance of “first-mover” advantage in relation to foreign pre-IPO stakes for 18 (non-bank) H-share issuers, listing between 1 January 2003 and 31 December 2004.

15 Peng, Mike W., Wang, Dennis Y. L. and Jiang, Yi, “An institution-based view of international business strategy: a focus on emerging economies,” Journal of International Business Studies, No. 39 (2008), pp. 920–36.

16 Peng, Mike W. and Heath, P., “The growth of the firm in planned economies in transition: institutions, organizations, and strategic choice,” The Academy of Management Review, Vol. 21, No. 2 (1996), pp. 492528.

17 This point is consistent with arguments in Yadong, Luo, “From foreign investors to strategic insiders: shifting parameters, prescription and paradigms for MNCs in China,” Journal of World Business, No. 31 (2007), pp. 1434. Luo notes that MNCs are now more likely to co-operate with domestic corporate entities given regulatory moves to place local and foreign investors on a more even keel.

18 BOCOM Prospectus, p. 87.

19 They also go by the name of foreign legal-person shares. See McGuinness, P. B. and Ferguson, M. J., “The ownership structure of listed Chinese state-owned enterprises and its relation to corporate performance,” Applied Financial Economics, Vol. 15, No. 4 (2005), pp. 231–46 at pp. 235–36 for further discussion.

20 McGuinness, P. B., “The privatisation process and evolving share ownership structure of mainland China's leading state-owned enterprises,” Journal of Financial Regulation and Compliance, Vol. 14, No. 1 (2006), pp. 3746 at p. 43. Equity stakes amassed prior to IPO by the NSSF and China SAFE Investments in BOCOM were converted into H-shares upon listing completion (see BOCOM Prospectus, p. 197, nn. 3 and 4).

21 See McGuinness and Ferguson, “The ownership structure of listed Chinese state-owned enterprises.”

22 Birtch, T. and McGuinness, P. B., “The 2001–5 price convergence in the A- and H-shares of Chinese state-owned enterprises: a story of unprecedented economic, regulatory and political change,” Journal of Financial Regulation and Compliance, Vol. 16, No. 3 (2008), pp. 239–50.

23 See Shameen, A., “Big money: time to pop the China stock bubble,” The Edge Singapore, 30 April 2007.

24 See ICBC Prospectus, pp. 9–10, 16 for details; the vendors were the Ministry of Finance and Huijin. ICBC Prospectus: Industrial and Commercial Bank of China Limited, Global Offering, 16 October 2006, at

25 As indicated in the BOCOM Prospectus: “Subject to certain limited exceptions, HSBC has agreed not to sell its H Shares prior to August 18, 2008.” “Substantial shareholders,” p. 198, n. 1.

26 See BOCOM Prospectus, pp. 99–105.

27 For such an argument, see Yam, S., “Regulators put A before H and talk up mainland listings,” South China Morning Post, 24 November 2007, p. B12.

28 See Dobson, W. and Kashyap, A. K., “The contradiction in China's gradualist banking reforms,” Brookings Papers on Economic Activity, No. 2 (2006), pp. 103–48, at pp. 139–40. Thanks are also due to an anonymous reviewer for highlighting this literature and for comments relating to the favourable economic conditions surrounding the 2003–07 contraction in NPLs.

29 These percentages were discerned from summary RMB levels shown in respective 2008 annual reports (CCB, p. 8, ICBC, p. 7, CITIC, p. 5, BOC, p. 2, CMB, p. 10, and BOCOM, p. 3).

30 Berger, A. N., Hasan, I. and Zhou, M., “Bank ownership and efficiency in China: what will happen in the world's largest nation?Journal of Banking and Finance, Vol. 33, No. 1 (2008), pp. 113–30.

31 Such percentages were discerned from summary RMB levels as shown in respective 2005 and 2008 annual reports (see Table 5A for net profit details and specific sources).

32 Dobson and Kashyap, “The contradiction in China's gradualist banking reforms,” p. 114. Thanks are due to an anonymous reviewer for alerting us to the literature on this subject.

33 Taxation issues may also be pertinent, given the move from a 33% corporate tax rate on bank net profits to 25% with effect from 1 January 2008. To amplify this point, reference to CCB's annual reports (2006, p. 58 and 2007, p. 146) and Half-Year Report (2008, p. 58) reveal that “income tax” as a proportion of “profit before tax” was 29.52% in 2006 and 31.42% in 2007; and was 32.22% for the first half of 2007 compared to 22.42% for the first half of 2008. Also, as pointed out by an anonymous reviewer, Chinese banks benefited greatly in 2006–07 from a cut in business tax. See “Banking regulator urges increased loans,” China Daily, 12 January 2006,, for further discussion on this in relation to Chinese banks' tax on loan income.

34 Thanks are due to an anonymous reviewer for comments on this point. In addition, as noted by Yusho Cho, “Bank of China profits from interest rate regulations,” The Nikkei Weekly, 24 March 2008, stipulated deposit and lending rates serve as the respective maximum and minimum rates. Spread levels were determined using Datastream.

35 See Laurenceson, J. and Fengming, Qin, “Has minority foreign investment in China's banks improved their cost efficiency?China & World Economy, Vol. 16, No. 3 (2008), pp. 5774. In an earlier study of 28 Chinese banks, Ariff, M. and Can, L., “Cost and profit efficiency of Chinese banks: a non-parametric analysis,” China Economic Review (2008), pp. 260–73, find that small and large Chinese banks tend to be less efficient than medium-sized banks.

36 Financial investment income appears to be significant contributor to net interest income. For BOC (Interim Report 2009, p. 64), nearly 20% of its “interest income” came from “investment securities and financial assets at fair value through profit and loss.” The lion's share (70.3%) came from “loans and advances to customers.” We also thank an anonymous reviewer for alerting us to the fact that a significant part of financial investment income may reflect favourable returns on bonds issued by the asset management companies.

37 BOC Annual Report 2008, p. 287.

38 ICBC Annual Report 2008, p. 75.

39 See BOC Annual Report 2007, p. 144.

40 See BOC Annual Report 2008, p. 194.

41 For an indication of how CAR is measured, useful reference can be made to the BOC Prospectus, pp. 79–80.

42 The page references relate to the respective 2008 annual reports for the state-owned commercial banks.

43 See CCB Prospectus, pp. 89–90.

44 CCB Prospectus, p. 85.

46 See CCB 2009 Half-Year Report, p. 51, for further details.

47 See Lee, B., “Temasek sells China Construction Bank Shares for $368 m,” The Strait Times, 28 November 2007.

48 See Ng, K. and Scent, B., “Bocom works to help HSBC boost stake,” The Standard, 11 March 2008, business section.

49 Lin, X. and Zhang, Y., “Bank ownership reform and bank performance in China,” Journal of Banking and Finance, Vol. 33, No. 1 (2008), pp. 2029.

50 Howson, N. C. and Ross, L., “Foreign minority equity investments in Chinese commercial banks,” The China Business Review (2003), pp. 1823 and 31.

51 Leung, M. K. and Chan, Y. K., “Are foreign banks sure winners in post-WTO China?Business Horizons, No. 49 (2006), pp. 221–34 at p. 226.

52 Luo Yadong, “From foreign investors to strategic insiders,” p. 18.

53 See BOCOM Prospectus, pp. 99–105.

54 The Bank of East Asia in 2008 became the first foreign player to be given permission to issue debit cards. See Kwong, R., “Renminbi card first for Bank of East Asia,” Financial Times, 20 May 2008, p. 16.

55 Birtch and McGuinness, “The role of international strategic investors in the listing of mainland Chinese state-owned enterprises,” investigate such motivations with regard to 18 H-share issuers listing between January 2003 and December 2004. They note that “foreign investors are driven by a variety of strategic motives, both competitive (learning, positioning) and cooperative (establishing relations, access to networks). Investors also appear to place considerable emphasis on using this form of investment to establish links with the dominant players … They are also seizing this opportunity to learn about foreign markets perhaps as a first step towards … more direct forms of investment” (abstract; parentheses shown as used).

56 Peng, Wang and Jiang, “An institution-based view of international business strategy.”

57 Peng and Heath, “The growth of the firm in planned economies in transition.”

58 Leung and Chan, “Are foreign banks sure winners in post-WTO China?”

59 Allen, F., Jun, Qian and Qian, Meijun, “Law, finance, and economic growth in China,” Journal of Financial Economics, Vol. 77, No. 1 (2005), pp. 57116.

60 Child, J. and Tse, David K., “China's transition and its implications for international business,” Journal of International Business Studies, Vol. 32, No. 1 (2001), pp. 521 at p. 13. Other reasons set out in Rui, Huachuan and Yip, S., “Foreign acquisitions by Chinese firms: a strategic intent perspective,” Journal of World Business, Vol. 43, No. 2 (2008), pp. 213–26 may also be pertinent.

61 Buck, T., Filatotchev, I., Nolan, P. and Wright, M., “Different paths to economic reform in Russia and China: causes and consequences,” Journal of World Business, Vol. 35, No. 4 (2000), pp. 379400.

62 “Suddenly money everywhere,” 2 February 2009, Business China Select, Vol. 35, No. 3 (2009), pp. 1–2, Economist Intelligence Unit Ltd, The Economist.

63 Luo Yadong, “From foreign investors to strategic insiders”; Peng, Wang and Jiang, “An institution-based view of international business strategy.”

64 Recent data suggest that foreign bank outlets account for only 2% of the aggregate Chinese market (see “Foreign Banks in China,” Financial Times, 2 February 2008, p. 16).

65 Evans, J. W., “Challenging Confucius: Western banks in the Chinese credit card market,” Business Horizons, No. 51 (2008), pp. 519–27 sounds a cautionary note in relation to Bank of America's credit-card venture with CCB by opining that: “Chinese culture should prove particularly resistant to serving as a profitable customer base in the short- to middle-time frames” (p. 519).

66 Child and Tse, “China's transition and its implications for international business,” p. 13.

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