Chinese Central Bank Pins Failings of Small Regional Lenders on Lack of Communist Party Influence


A senior official from the People’s Bank of China (PBOC) has pointed the finger of reproach at poor corporate governance and lack of effective oversight by the Chinese Communist Party (CCP), following a string of potential bank runs and failings amongst the country’s smaller regional lenders since the first half of 2019.

In an article written for PBOC’s official news site Zhou Xuedong (周学东), chair of the PBOC office and PBOC spokesman, said that “the background root cause of the risk of many small and medium banks lies in negligent corporate management, as well as associated financial corruption and crime.”

Zhou focused in particular on Inner Mongolia’s Baoshang Bank – which in May 2019 became the first of a string of regional Chinese banks to come unstuck, prompting a forcible take over by PBOC and the China Banking and Insurance Regulatory Commission (CBIRC) on 24 May.

This was a major event in Chinese financial history, and it’s worth heeding the cruel lesson about the failure of corporate governance that it highlights.

A fact worth noting is that as early as December 2015 Baoshang Bank publicly issued 6.5 billion yuan in ten-year tier-2 capital bonds

The bond prospectus indicated that as of 30 June 2015 Baoshang Bank’s non-performing loan ratio was 1.60%, its provision coverage ratio was 168.68% and its capital adequacy ratio was 10.82%, while its owners’ equity was 24.3 billion yuan.

A year and a half subsequently in May 2017, a special investigative team discovered that since 2005 Baoshang Bank’s accounts for major shareholders had accumulated to as high as 150 billion yuan, and that annual interest was as high as 10 billion yuan, with no means to repay the principal or pay interest…the level of insolvency exceeded the imagination.

The takeover team led by China Construction Bank (CCB) subsequently imputed Baoshang Bank’s woes to a failure to properly establish an internal party committee to exercise an oversight role.

For a long period of time Baoshang Bank’s party committee was one only in appearance, and the so called “core function of the party” had long been replaced by the “core function of the chairman.”

All major decisions of Baoshang Bank, all appointments and dismissals of key cadres, all major arrangements and major usage of funds, did not require the collective discussion or decisions of the party committee , and handling by the chairman became the norm.

Because Baoshang Bank lacked the supervision and guidance of the party, it created a warped culture, and some party leaders and cadres used their power to pursue private profit.

Zhou Xuedong also pointed to lack of an effective board of directors, lack of an effective risk management system, and seizure of key functions by the Baoshang Bank chair, as key failings leading to its eventual demise.

In order to overcome these problems Zhou called for “exploring the establishment of standardised and effective corporate governance mechanisms for small and medium-sized banks,” including:

  • Fully employing the leadership role of party organisations, effectively selecting party committee secretaries and chairmen.
  • Establishing effective restrictions on equity structures, achieving rational and diversified equity structures, raising the effectiveness of corporate governance.
  • Strengthening external supervision and management, improving information disclosure mechanisms, nurturing healthy corporate governance culture for commercial banks, increasing corporate transparency.

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