New bank set to revitalize Northeast China
By Wu Yong (China Daily)
Updated: 2004-05-31 07:47

SHENYANG: Northeast China's Liaoning Province will proceed with setting up the Northeast Revitalization Bank (NRB), to be based on a city commercial bank, says a senior official from the provincial government.

The new bank, to be built on the framework of Shenyang City Commercial Bank (SCB), is expected to be operational on August 8.

The local government has taken measures to improve SCB's general performance for the upcoming large-scale operation.

"This bank, with its unique position, will play an important role in the nation's drive to revitalize its old industrial bases," said Yang Zimeng, director of No. 1 division of the financial affairs office of Liaoning provincial government, who is also responsible for structuring the new bank.

This new bank would work as a regional joint-stock commercial bank covering the provinces of Liaoning, Jilin and Heilongjiang in northeastern China, says Yang.

As the name suggests, the bank is to provide financial support for the revitalization of northeastern China China's old heavy industrial hub, help local small- and medium-sized enterprises with financing and prompt the renovation and upgrading of regional financial resources.

The local government last month handed the planning to the State Council, China's cabinet. And the China Banking Regulatory Commission (CBRC) will send officials for examination shortly.

Competitors for NRB

Among the three provinces in Northeast China, Liaoning is not the only one that has been planning to set up such a bank. Its neighbouring provinces of Jilin and Heilongjiang have had similar thoughts since the end of 2003.

Even in Liaoning, there are two candidates for the location of new bank, Shenyang and Dalian.

"I believe we have a great hope of winning regulatory approval, as Shenyang has many unique advantages," Yang said.

Liaoning Province is the undisputed leader in northeastern China in terms of the scale of its economy. Shenyang, the capital of Liaoning Province, is the biggest city in this region.

Meanwhile, Shenyang itself is the regional financial centre, home to thousands of financial institutions. The Shenyang branch of the People's Bank of China, the nation's central bank, is responsible for the administration of financial institutions in the three provinces of northeastern China.

Shenyang City Commercial Bank's performance is good compared with its counterparts in Jilin and Heilongjiang provinces. It generated a profit of 51 million yuan (US$ 6 million) last year.

Earlier this year, Liu Mingkang, chairman of CBRC, had talks about the establishment of the new bank with Chen Zhenggao, mayor of Shenyang.

Liu agreed that Shenyang City Commercial Bank could be developed into a regional bank if it reached CBRC requirements, which include capital adequacy, non-performing loan ratio and corporate governance.

Liu was supported by Zhang Guobao, vice-director of the National Development and Reform Commission (NDRC), who is also the director of the Northeast Revitalization Office of the State Council.

"NDRC supports CBRC's suggestions of retooling a local commercial bank and setting up a regional bank when it meets the demands," Zhang said.

New wine in old bottle?

The establishment of a new regional joint stock commercial bank based on the current city commercial bank involves three aspects.

The first and most important one is to improve the structure of shareholding.

Registered capital of the bank will be increased to 2.8 billion yuan (US$337 million) to 3 billion yuan (US$361 million) through issuing new shares. The State-owned stake would increase to 250 million yuan (US$30 million). The ceiling for a single shareholder is 300 million yuan (US$36 million). Private and international institutional investors are all encouraged to take part.

"The method can not only diversify the shareholder structure, but can, by referring to foreign experience, help improve the property rights system and corporate governance," said Yang Zimeng.

Co-operation with an international strategic partner would help set up modern corporate governance inside the new bank.

At least three overseas financial institutions have expressed the wish to participate in the new bank.

The second problem is to deal with bad loans and non-performing debts.

Shenyang City Commercial Bank has to increase its capital adequacy ratio to 8 per cent and reduce its bad loans sharply before the operation. The bank has had discussions with the Shenyang municipal government on dealing with this problem.

But the bank declined to provide any details about measures it was taking and progress.

The last task is the integration of provincial and regional city commercial bank resources.

The Shenyang municipal government has set ambitious plans to accomplish these tasks by the end of July and inaugurating the new bank on August 8.

New bank rush

Since the end of last year, there have been reports of plans to establish several regional joint stock commercial banks, including the Northeast Revitalization Bank, the Bohai Bank and re-opening of the Hainan Development Bank.

This is the first such wave since the central government froze the establishment of new commercial banks to cool down overheated investment in the middle of the 1990s.

The freeze was lifted and banks flocked to have a market presence.

CBRC also said in February it would take a prudent stance in approving new joint-stock banks, but would encourage private and foreign capital to buy into existing commercial banks.

The commission said that it has decided joint-stock commercial banks would be the future direction of China's banking industry.

However, experts still entertain doubts about this new trend. Will it be a role booster for the local economy or a bad move that would only bring out bad loans?

It seems that the nation's rapid development always grows with the startup of a new regional financial institution.

China set up the Shenzhen Development Bank in the 1980s when developing Shenzhen in southern Guangdong. Later, the Shanghai Pudong Development Bank was established in 1992 when the central government decided to develop it in Shanghai.

There were also calls for establishment of a specialized western development bank to suit the demand in the nation's western development drive initiated in the late 1990s.

"Northeastern China needs a regional bank in revitalization. So it could absorb the private capital and support local private enterprises," said Lin Muxi, president of the economic department of Liaoning University.

There are over 3 million small- and medium-size companies around China.

They contribute 50 per cent of the nation's gross domestic product (GDP), but have only 20 per cent of capital supply.

Financial institutions mainly serve State-owned enterprises (SOEs) while private companies have very little access to funds from the four major State banks, said Qu Wei, president of Chinese Academy of Social Sciences of Heilongjiang Province.

This phenomenon is rather severe in northeastern China where the economy is dominated by large-scale SOEs.

Private enterprises only got 1.27 billion yuan (US$153 million) in loan from banks in 2000, accounting for 0.4 per cent of the total loans granted by banks in Heilongjiang.

There are around 2.8 billion yuan (US$339 million) available for those fund-thirsty private companies if Heilongjiang sets up such a regional development bank.

The aim is clear and simple. But can those planning the regional bank shoulder the role of financing local enterprises?

Regional dilemmas

A regional bank has to solve at least three problems before making profits from the ballooning financial market, analysts say.

The first one is scale. The newly established local bank's scale and capacity is far behind State-owned banks. And the large-scale enterprises usually have good relationship with the big four State-owned banks. It is not an easy job to take a share from the big four lions.

The second, small- and medium-sized enterprises have promising futures. But their credibility is also rather low.

Most of the nation's small- and medium-sized enterprises' credit rating is below BBB, while banks prefer customers of AAA or AA to avoid risks.

And statistics from the National Development and Reform Commission show that more than 56 per cent of small- and medium-sized enterprises were rejected on loan applications because they could not provide loan guarantees or mortgages.

"So many private enterprises could not get loans from banks. I think the main reason behind is we have not made full use of the financial institutions but not the shortage of financial institutions," said Wang Dayong.

The new financial institution could do nothing about local financial problems if it was not well designed, Wang warned.

The third problem is the capacity of local economy.

A regional bank must base itself on the local economy. If a city's economy is not good enough, the new financial institution would do nothing to avoid capital outflow.

Heilongjiang Province's annual new added deposits are around 20 billion yuan (US$2.4 billion). There is 14 billion yuan (US$1.7 billion) capital available for enterprises but the local enterprises could only consume 5 billion yuan (US$605 million). The rest goes to the economically prosperous coastal cities.

China's banking hierarchy consists of the four State-owned banks the Industrial and Commercial Bank of China, China Construction Bank, Bank of China and the Agricultural Bank of China.

Beneath them are three policy banks, the China Development Bank, the Export-Import Bank of China and the Agriculture Development Bank of China, which finance infrastructure and other long-term State-supported, non-profit making projects.

Next on the ladder are 11 joint stock commercial banks, most of which were set up in the 1990s. Four are listed on the domestic stock market, the Shanghai Pudong Development Bank, the Shenzhen Development Bank, the China Merchants Bank and the China Minsheng Bank.