Fitch: Outcomes Uncertain with China Bank Ownership Reform

Wed Aug 13, 2014 2:44am EDT

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(The following statement was released by the rating agency) SHANGHAI/SINGAPORE, August 13 (Fitch) The Chinese government's plans to restructure the ownership of state-owned banks - to allow for greater private investment - has the potential to kick-start wide-ranging internal reforms in key lenders, says Fitch Ratings. However, it remains to be seen how the reforms will be implemented - and to what extent greater private ownership will translate into control, improved corporate governance, and the ability to direct lending away from policy-oriented functions. The Bank of Communications (BoCom) is the first lender in China to have announced that it is studying plans to take advantage of the reform initiative and increase private ownership. BoCom's ownership structure already includes large private investments including HSBC's 18.7% stake, which stands second only to the Ministry of Finance's 26.5% share. The objective of the reforms is to facilitate better corporate governance and greater operational flexibility through a more diversified shareholder base on the part of reformed financial institutions. Under a best-case scenario, restructured companies such as BoCom will be able to retain the support of government, while also taking advantage of new management practices and better governance frameworks. It is important to recognize, though, that there is no established precedent for how these ownership reforms will be implemented - and whether the planned restructuring will translate into meaningful reform of bank management, corporate governance and operational flexibility. This is especially the case in light of the predominance of a state-appointed board and executive management positions at the state banks; the highly regulated nature of the banking industry; and the sector's strategic role in a centrally controlled economy. An uneven application of the reform rules and a failure to develop a market-driven playing field for the restructurings, would mean that certain lenders (including BoCom) may be at a disadvantage in boosting their market share or accessing new capital - given the current dominance of the larger state-owned banks. Contacts: Benjamin Lin Associate Director Financial Institutions +86 21 5097 3189 Fitch Ratings (Beijing) Limited 1015, 10/F IFC Tower A 8 Century Avenue, Pudong Shanghai, 200120 Jonathan Cornish Managing Director Financial Institutions +852 2263 9901 Justin Patrie Senior Director +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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