The Hindu Business Line : Divestment: The Chinese example

THE latest episode in the UPA serial has shown the Left and its sympathisers protesting against the divestment of 10 per cent stake in one of India's industrial public sector units (PSUs) — BHEL. It is instructive to compare this with what China has been doing in the a much more sensitive sector — Banking — in recent months.

The latest news is that China is commencing initial public offerings (IPOs) of a number of its large State-owned Banks. The IPOs are being made on the Hong Kong Stock Exchange with a view to giving the shares to potential foreign as well as Chinese investors. Ahead of the IPOs, the Chinese Government has roped in strategic investors in the form of large multinational banks, Bank of America and HSBC to quote only two examples.

Bank of America has put down $3 billion for a less than 10 per cent stake in China's fifth largest public sector Bank, China Bank of Construction. HSBC has put in $1.75 billion for a stake of less than 10 per cent in the Bank of Communications. (This IPO has just been successfully completed.) The amounts proposed to be divested through the IPOs are mind-boggling (see Table). The list is still being extended.

Slated for further IPOs during the year are the Shanghai Investment and Trust Bank Investor (Temasek of Singapore likely investor), Bank of Beijing Investor (where ING Group of Netherlands is a likely investor) and a few others.

The fact is that China has gone ahead with initiating divestment of its shares in public sector banks with a view to improving their management and performance, the FDI involved being an incidental benefit. China is aware that its financial system is in need of an overhaul. It is well-recognised that the banks have large non-performing loans on their books. Despite this, if Bank of America is willing to invest in a minority stake, it only means the acquirer has faith in the growth potential of the banking sector and continuing reforms of regulation and management.

The latest buzz is that the Government of China has also allowed Bank of America, to bring in 50 plus managers to strengthen the bank's lending management culture. China's zeal for catching up with the developed world has helped our own Leftists overcome their fear of foreigners gobbling up shares even in a vital sector, like public sector banks.

The transition from State control to commercial lending in the Chinese banking system has already started. The Chairman of one of the banks having an IPO is reported to have stated publicly that one of the first things he did on taking charge from his predecessor, was to put the Board of Directors in a position to take decisions.

The local unit of the Communist Party, which was all along inspecting all lending decisions, was asked to step aside. This decision marks a sharp de-politicisation of banking. This is also a first step towards commercialisation.

Whether a new strategic partner, like Bank of America, with its minority stake and just one place on the Board will be able to effect a more complete transformation of the Bank, remains to be seen.

One commentator in the international financial press has pointed out that it is Bank of America's tradition to take risk-oriented decisions. After all, it was Bank of America's legendary founder who had decided in the 1930s, purely on the basis of his gut-instincts, to finance an itinerant and insignificant film producer's proposal to convert cartoons into films. The film producer was Walt Disney and the film was Snow White.

The founder of Bank of America, A.P.Gianinini, had to overrule his management-trained son and others who had advised him against taking such risks. It turned out to be a risk worth taking. So too did Bank of America take a risk when it financed Gone with the Wind a glowing success of the cinema industry in its time. May one hope that Bank of America's daring investment in Chinese banking follows up this tradition of taking risks and succeeding in them.

Returning to China's divestment, its banking IPOs bring into focus the discordant line adopted by our Indian Leftist brigade against the divestment of a 10 per cent stake in BHEL and similar openings in the banking sector.

This is contrary to what China's admittedly Leftist rulers are doing. Our Leftists' resistance is typical of a mindset, which "lacks" self-confidence in our being able to control the private investor, who is after all in a minority.

Our banking regulator is ultimately Indian and competent. The Government of India sets the rules of the game. Why should one be afraid of the foreign or domestic minority private investor?

Incidentally, the Chinese divestment story goes farther than banking. One of the major mining ventures in that country is also issuing an IPO simultaneously with the Banking IPOs, expecting to garner billions of dollars as a result.

This shows the pragmatic way in which China has approached issues of State control and divestment. If there is a minority interest in State enterprises held by private shareholders, foreign or domestic, it cannot do harm to the efficiency of the enterprise. On the contrary, it may help increase the efficiency by setting benchmarks of market-based return.

This is not to say that all is well with China's banks. The Chinese banking reform is just beginning. A recent review of Chinese reforms in Financial Times, June 20, has pointed out that there are trifling problems faced by China's public sector banks.

Among other things, Chinese banks share our problem of over-staffing and large number of branches, besides large non-performing loans.

To quote one instance of reform in Chinese banking, three years ago, one of the banks, ICBC, had a workforce of about 5,00,000. It has since closed down about half of its 40,000 odd branches and cut about 1,30,000 staff. The Bank Chairman said that he still has too many workers, but pleads "political sensitivities" when asked when he will reduce this further.

He states, "We will gradually solve the problem through retrenchments". A familiar story, except that our Chairmen will scarcely give expression to such problems in public! And we claim that India has freedom of expression — but not for chief executives of public sector entities and banks in particular.

The example cited demonstrates the process of transformation, which China's banks have embarked on.

Maybe, India's public sector banks are already cost-conscious, at least to a limited extent since some of their shares are listed on the stock markets and stock market prices are signals.

But the Chinese experience shows that much can be achieved given the political will and executive grit to face political sensitivities. It is also important to note that the Chinese have scored successes in reducing non-performing loans from their earlier high levels.

The Chinese Government has spent $30-50 billion of its own resources to recapitalise its bad debt liabilities. This must be one reason why international banks are willing to lend their hand to participate in China's banks' equity and to help reform Chinese banking.

The progress of China's economic reform, especially in banking, has many lessons for us.

In the context of the latest debate in India on BHEL, not the least important, is their courageous and pragmatic decision to invite private investors, both domestic and foreign, into our banks.

As against this, we are still fighting shy of such an open invitation to multinational bankers.

Perhaps, the Prime Minister and the Finance Minister are quite frustrated already with the Left's "righteous" indignation about the limited divestment in BHEL.

But, is it too much to hope that given China's bold initiative on bank divestment, India's masters will moderate their stand at least in the near future?

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