Topic: Leadership - Peking University Business Review - NO.6 VOL.23 2006/06

Author: Li Yining
Publisher:
Publish Date: 2006-06-01
Features: Why Introduce Strategic Investors
Introducing strategic investors as an important component of the shareholding reform of commercial banks, their role and significance should be viewed in the context of the overall reform. China's state-owned commercial banks originated from state policy banks and specialized banks. Although they have undergone gradual market-oriented reforms for many years, their management and operations have improved to some extent, but due to the unresolved core issue of property rights, problems such as the separation of government and enterprise, weak risk control, bloated institutions, overstaffing, and heavy financial burdens have long been difficult to eliminate. The state-owned commercial banks have been plagued by deep-rooted issues and faced significant challenges. By the end of 2003, the audited non-performing loan balance of China Construction Bank (pre-restructuring) reached 271 billion yuan, with a non-performing loan ratio of 12.4%, and a loan and non-loan loss provision gap of 216.1 billion yuan, far exceeding the book net assets of 136.4 billion yuan, technically making the bank insolvent. Due to the important position of state-owned commercial banks in the financial system, fundamental reform has become extremely urgent. As Premier Wen said, this reform is a "fight to the finish" and a "practice where we cannot afford to lose." The primary significance of the shareholding reform lies in its ability to truly transform the bank into a business rather than a quasi-governmental institution. Once this fundamental issue is resolved, a series of reforms such as capital replenishment, corporate governance structure development, deepening management system reform, introducing strategic investors, and listing can then be based on a solid foundation. However, due to the entrenched traditional management models within state-owned commercial banks and the resulting inertia, achieving comprehensive transformation in corporate governance, development strategy, business processes, risk management, financial management, and incentive mechanisms within a short period will undoubtedly be a painful transition. Therefore, introducing strategic investors has become a necessary measure for reform. Strategic investors can play two roles in this transition:
1. A benchmark for learning. Good strategic investors possess advanced experience in management and operations, serving as a benchmark for state-owned commercial banks.
2. An external driving force. Strategic investors, acting in the interests of shareholders, will actively assist the bank in reform through in-depth cooperation at both capital and management levels, forming an external driving force. Practice has proven that successfully introducing strategic investors can help the reform avoid many detours.
The arduous journey of introducing strategic investors
When introducing strategic investors, China Construction Bank firmly adhered to the basic principles of "maintaining absolute state control, improving the equity structure, introducing advanced experience and technology, and maximizing the preservation and appreciation of state-owned assets." It also established criteria for strategic investors—strategic investors should be large overseas financial institutions with a certain scale (total market value of over $30 billion and total assets of over $300 billion), expertise and leading advantages in their business fields, a willingness to transfer technology and management experience to the bank, and no fundamental conflicts of interest with China Construction Bank's Chinese strategy. It is worth noting that when China Construction Bank began its shareholding reform, it was open to all domestic and international investors, with more favorable terms for domestic investors, and the share price was set at 1 yuan per share based on book net assets. However, before the bank went public, domestic investors were not very optimistic about investing in it. It was not until the day before the founding meeting that the five founding shareholders required to establish the shareholding company were finally determined, allowing the founding meeting to proceed as scheduled.
After determining to introduce overseas strategic investors as a reform measure, China Construction Bank sent invitations to nearly 20 institutions worldwide that met the criteria and were interested in investing in Chinese banking. However, the initial response was not enthusiastic. Foreign institutions and international public opinion generally viewed investing in China's state-owned commercial banks as too large in scale and too risky. All potential strategic investors proposed by Bank of America before had investment models that involved symbolic, small-scale equity investments, followed by cooperation in specific business areas. We negotiated with all interested investors simultaneously, but due to significant disagreements over crucial interests, progress was slow, and Citigroup, Bank of Nova Scotia, and Morgan Stanley withdrew one after another, leaving the introduction of strategic investors in a difficult situation. We actively sought new partners, and Bank of America, the second-largest bank globally with the largest retail network in the U.S., gradually became our primary choice. After arduous negotiations, Bank of America accepted our requirements. Bank of America committed never to gain control, with a maximum shareholding ratio of 20%, and was willing to avoid competition with China Construction Bank, close its retail business outlets in China, and not oppose our establishing branches in the U.S. or acquiring banks. Thus, wely chose Bank of America. Subsequently, we also introduced Temasek Holdings, a Singaporean company, from Asia. As a Singaporean company, Temasek is culturally closer to us, and its entry was a strategic addition to the partnership with Bank of America.