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R 090940Z MAY 06
FM AMEMBASSY BEIJING
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UNCLAS SECTION 01 OF 02 BEIJING 008476 
 
SIPDIS 
 
SENSITIVE 
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USDOC FOR DAS LEVINE AND ITA/MAC/AP/MCQUEEN 
TREASURY FOR OASIA/ISA KOEPKE AND DOHNER 
STATE PASS CEA FOR BLOCK 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN; NEW YORK FRB FOR DAGES/CLARK 
STATE PASS USTR STRATFORD/WINTER/MCCARTIN 
 
E.O. 12958: N/A 
TAGS: EFIN EINV PGOV CH
SUBJECT:  FOREIGN DIRECTORS OF CHINESE BANKS HELPING TO 
IMPROVE GOVERNANCE 
 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE 
ACCORDINGLY.  NOT FOR DISTRIBUTION OUTSIDE USG CHANNELS. 
 
¶1.  (SBU) Summary:  During a lunch on April 19 lunch with 
analysts from the New York Federal Reserve Bank, three 
foreign directors of four Chinese banks (Minsheng Bank, 
China Everbright Bank, Bank of Beijing and Xi'an City 
Commercial Bank) shared their experiences.  On the question 
of governance, they all highlighted the continued control 
of the Communist Party over key decisions such as bank 
leadership, but were upbeat on their assessment of 
improving governance standards.  Developing a credit 
culture remains a major challenge, especially since China 
still lacks an effective legal system and credit 
information bureaus.  Still, all of the directors agreed 
that foreign directors are having a positive impact and 
that the Chinese leadership supports foreign participation 
in Chinese banks.  End summary. 
 
¶2.  (U) On April 19, a delegation of analysts from the New 
York FRB met with three foreign directors who sit on the 
boards of several Chinese banks:  Jim Stent of Minsheng 
Bank, Frank Hawke of China Everbright Bank, and Michael 
Ipson, banking specialist from the International Finance 
Corporation (IFC) Beijing rep office, who represents IFC on 
the boards of the Bank of Beijing and the Xi'an City 
Commercial Bank. 
 
Party Influence 
--------------- 
 
¶3.  (SBU) One of the issues complicating the reform of 
Chinese banks is the continued influence of the Communist 
Party on management decisions.  Despite this, Ipson of IFC 
believes that the banks have actually made progress in 
improving corporate governance.  He reported that the Party 
Secretary of one of his banks has even praised IFC's role 
 
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in improving governance standards.  Stent of Minsheng 
agreed, saying his bank generally wants to reach 
international standards, but it is a difficult process, as 
Chinese companies have had boards of directors for less 
than 20 years.  He stated that the Party appoints the 
Chairman and President of every bank, with nominations 
going to the Party Secretary at the China Banking 
Regulatory Commission for approval.  Because of this, Hawke 
said his bank has changed the name of the "Nomination 
Committee" to the "Human Resource Subcommittee." 
 
¶4.  (SBU) Regarding the Party's influence over credit 
allocation decisions, Hawke averred that the Party has not 
been making these decisions at Everbright Bank, but joked 
that given the bank's poor track record, even the Party 
could have done a better job.  In his view, the 
Government's biggest quandary for the state-owned banks is 
how to get them to act like Western banks without losing 
control.  Hawke expressed pessimism that the banks will 
succeed, predicting that the banks will need to be 
recapitalized again at some point in the future. 
 
No Credit Culture 
----------------- 
 
¶5.  (SBU) Stent said one of the biggest challenges is the 
lack of a real credit culture.  In the past, they were 
simply arms of the Ministry of Finance, and even now they 
are not used to the credit culture concept.  The Minsheng 
Bank has only existed for ten years and only has experience 
with a growing economy.  Although Minsheng's NPL ratio is 
under 2 percent, the ratio could go up if the economy 
falters and companies begin to fail.  Banks continue to 
favor lending to state-owned enterprises and to state- 
sponsored projects because the state stands behind them. 
Eventually the banks will have to start doing a "means and 
purpose test" for loans.  Ipson commented that the banks 
will continue lending to SOEs because they are the lowest 
risk borrowers.  From the Everbright bank experience, Hawke 
pointed out that "before you build, you have to put out the 
fire."  Before Everbright could change its lending 
policies, it had to first "staunch the bleeding."  To do 
this, he said the bank headquarters withdrew all credit 
authority from the local levels.  In his view, it is 
necessary to separate the credit and marketing functions. 
 
BEIJING 00008476  002 OF 002 
 
 
Stent noted that there has been some debate about this 
issue.  When he was at the Bank of Asia in Thailand, credit 
authority was taken away from the branches and the branch 
managers became sales managers instead.  This, of course, 
required a very responsive credit function at the head 
office, which would not be true in Chinese banks. 
 
¶6.  (SBU) All three directors agreed that building a credit 
culture is a slow process.  Stent noted that it takes a 
great deal of training at all levels, with a total 
commitment from the senior management.  To assist in this 
effort, Ipson pointed out that the IFC is helping the 
People's Bank of China develop a credit information bureau. 
Even a state-owned entity like this is a step forward, 
although it will take a long time to sort out the legal 
system to support it.  He noted that China has more of a 
"rule of judges" rather than "rule of law."  Hawke pointed 
out that one major legal problem for banks is that a bank 
legally cannot foreclose on a borrower's primary residence. 
 
Foreign Director Effect 
----------------------- 
 
¶6.  (SBU) The directors all agreed that they are having a 
positive influence in the way their bank boards operate. 
Hawke said he had succeeded in ratcheting back Everbright's 
lending targets for 2006.  Despite Everbright's negative 
capital position, Hawke said his bank originally aimed at 
growing its loan portfolio by 12 percent in 2006.  Hawke 
countered with an 8 percent proposal, and eventually 
persuaded the bank to adopt a lower target.  He noted that 
Chinese bank boards will usually put off a vote if it 
appears there will be a dissenting vote because dissenting 
votes have to be reported to the China Banking Regulatory 
Commission (CBRC).  Stent pointed out that the standard is 
even higher for listed banks like Minsheng:  dissenting 
votes have to be made public.  In his bank, if an issue 
will not receive unanimous support, it will be pulled.  He 
commented to Hawke that it was impressive that Everbright's 
board discussed the loan growth issue so openly.  Hawke 
suggested that despite Everbright's bad loan problem, it 
actually has a reputation for better-than-average 
management.  Perhaps this is because the ADB, the first 
foreign investor to take a stake in a Chinese bank, has 
been working with Everbright since 1997.  The three 
directors agreed that Everbright and China Merchants at 
least had the best reputations for customer service.  Ipson 
commented that the banks still need to develop more income 
options because thus far over 90 percent of bank income is 
generated from interest on loans.  Stent commented that the 
banks are not yet using their ability to charge higher 
interest for higher risk. 
 
¶7.  (SBU) Although foreign investors are helping to reform 
the banking system, Stent commented that there has been a 
backlash against foreign investment in the banks.  As a 
result, he suggested the senior leadership may slow the 
reform process.  Ipson argued that China's leadership still 
expects foreign participation in the banking sector will 
make a major difference.  Hawke agreed, noting that the 
Chinese Government is very concerned that the continued 
misallocation of capital will eventually affect growth. 
China is looking to foreign investors to help it improve 
the overall management of the banking sector. 
 
¶8.  (U) Report was cleared by the New York FRB delegation. 
 
RANDT