Introduction

The objective of this paper is to propose a corporate governance structure for the portfolio of Chinese State-Owned Commercial Banks (SCBs). The purpose of the corporate governance structure would be to improve the financial performance, internal controls and risk management capacity in order for the portfolio of commercial banks as a whole, as well as each individual bank, to thrive in a fully competitive environment. The paper is further trying to describe the basic policy, procedures/ process and institutional frameworks that should be put in to place to achieve those objectives, to monitor progress and to intervene where progress falls short.

The SCBs are understood to, over time, be active in a fully competitive market where privately owned domestic and international competitors will be allowed to compete for banking business without any restrictions. This paper is not concerned with the non-commercial banking activities within the SCBs or the state owned banks active with policy based or state financing. It is necessary to separate non-commercial banking activity undertaken at the request of the state from the SCBs, a step that has reportedly largely been accomplished. The commercial banking activity must be held and accounted for in a separate structure in order to maintain a strictly commercial purpose and culture. 

The proposed structure reflects an ultimate development based on experiences from the private and the state owned sector. Extensive experience is drawn from especially Sweden where the government has attempted to combine the introduction of competition without resorting to extensive privatisations. Combining the introduction of competition in a sector where the state remains a large, or even dominant, participant without resorting to privatisation is generally accepted as counter productive. This is due to the fact that it is very hard for private owners with a commercial cost of capital to compete with a former state monopoly that is not only very dominant but also maintains its state financing and is perceived by its management to have a lower cost of capital. However, the Swedish experience has shown that it is possible to change this mindset and achieve considerable growth in the value of SOEs, as well as an improved dividend yield. The growth achieved in the Swedish Government Portfolio was almost twice that of the Swedish Stock Market during the same period. It would therefore be reasonable to conclude that some of the origins stems from the newly introduced corporate governance structure that enjoyed support both externally and internally and was labelled “valuable companies creates valuable jobs”. 

The fundamental lesson from Sweden is that a consolidated ownership function with a very clear objective, communicated distinctly and with strong emphasis, can actually have a substantial impact on the performance of a large portfolio of companies. Furthermore, it is also necessary that such a corporate governance structure can win public support and be perceived as credible in its attempt to run the portfolio in an entirely professional manner. A key factor to win this support lies in the ability to separate the responsibility for government policy and government ownership in a credible way even in the eyes of the public. 

The interface between government and business is always a sensitive area, as has been witnessed not only in countries with recent experiences of economic reforms, such as the former Soviet Union, but also in any western European country. The best remedy seems to be an arms-length distance between politics and business, combined with transparent and strictly contractual interactions based on professional and commercial merits. Increased face-to-face contact between government and business is bound to lead to suspicions of wrongdoings. 

Although the huge organisational size of the SCBs can make a comparison with the much smaller Swedish portfolio of SOEs seem less relevant, someone like Sun Zi can offer some hope when he says that “Generally, management of many is the same as management of few. It is a matter of organisation”. Nevertheless, timing is always of essence when understanding such a venture or “ He who relies on the situation…. needs use but little strength to achieve much”. 

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