Dong Ximiao Highlights Need for Corporate Governance Reforms at Smaller Chinese Banks

A leading Chinese economist has highlighted the need for greater reform of the country’s smaller-scale regional lenders, following a recent wave of mergers to shore up their stability.

“At present China’s commercial banks, and in particular small and medium-sized banks, still suffer from inadequacies and problems when it comes to corporate governance,” said Dong Ximiao (董希淼), chief researcher at the Zhongguancun Internet Finance Research Institute and a researcher at Fudan University, in an opinion piece published by Cebnet.com.cn on 16 May.

According to Dong these problems include:

1. The need for optimisation of equity structures and lack of standardised shareholder regulation. “The problem of absentee owners has long existed – on the one hand, equity is diffuse at certain smaller banks, and the level of participation of shareholders in corporate governance is low,” writes Dong. “At some rural village financial institutions there is the problem of an excessive number of natural person shareholders.”
2. The qualifications of shareholders at some banks is comparatively weak. “Certain shareholders lack the willingness and capability to make long-term investments, and are only concerned with dividends and financing, but not concerned with the long-term development of banks.”
3. Shareholders have made capital contributions which are not real. “There have been fake capital contributions made by shareholders to banks, where the sources of funds are unclear, and shareholders have not used their own funds to subscribe for shares, or have even used the banks own funds to engage in internal circulation.”
4. Lack of effective checks and balances. Dong pointed in particular to lack of supervision by the shareholders assembly of boards of directors and supervisory boards; the need for further improvements in the planning capability of boards; uncertainty surrounding the role of supervisory boards, as well as absenteeism when it comes to boards of directors and supervisory boards.
5. The need for further standardisation of affiliate transactions. Dong said that in some cases the actual controllers of banks had engaged in affiliate transactions that clearly breached the principles of fair trading or involved the transfer of profits, and that in extreme cases major shareholders had made use of small-scale banks as “ATM’s.” “In recent years, the operating model of financial holding companies has continuously emerged, and non-standardised financial control relations serves as one of the reasons for the increase in the volume of illicit affiliate transactions,” wrote Dong. “Some private capital and non-financial enterprises have rushed into the banking sector, in order to both covertly and overly control small and medium-sized banks and insurance companies, to in actuality form financial holding groups.”

In order to deal with these problems, Dong has called for:

1. Strengthening management of shareholder qualifications and continuous optimisation of equity structures.
2. Improvements to the establishment of boards of directors and strengthening the role of boards of supervisors.
3. Raising comprehensive corporate management capabilities.
4. Further standardising affiliate transactions.
5. Establishing scientific performance assessment systems.

China’s 2022 Government Work Report released in March called for “deepening the reform of equity structures and corporate governance at small and medium-sized banks.”