Source: China Daily  12/04/2007 

As the sector continues to mature, Chinese banks have significantly improved their corporate governance and risk management, according to a new report released by the Research Center of Corporate Governance of Nankai University in Tianjin. 
 
Publicly listed banks in the country had superior corporate governance performance to the more than 1,000 other listed enterprises on the Chinese mainland, according to the recently released study.  
 
A total of 135 domestic banks now have more than an 8-percent capital adequacy ratio, while only eight banks reached the standard at the end of 2003, the report said.  
 
Banks are required to have at least an 8-percent capital adequacy ratio before they can have a commercial operation and apply for mainland listings. Many banks now have a capital adequacy ratio surpassing 12 percent.  
 
“Heated competition brought by foreign banks since the country opened its financial market, increasing mergers and acquisitions and expanding demand for service diversification and specialization have pushed Chinese banks to improve their corporate governance,” said Liu Mingkang, chairman of China Banking Regulatory Commission (CBRC), the country’s banking watchdog.  
 
While significantly improving their corporate governance, banks have at the same time greatly increased their profitability.  
 
Among the 10 most profitable listed companies, five were from the banking sector.  
 
Industrial and Commercial Bank of China (ICBC), the country’s largest commercial bank, recorded a net profit of 63.3 billion yuan in the first three quarters of 2007, the highest of the 66 listed companies whose net profits were 1 billion yuan more.  
 
China Construction Bank (CCB), the country’s second-largest lender, posted a net profit of 57 billion yuan in the first three quarters.  
 
Also on the list are the Bank of China (BOC), the Bank of Communications (BOCOM) and China Merchants Bank.  
 
“Rapid reform of banking assets and increasing innovation have also enabled Chinese banks to improve corporate governance and risk control,” Liu said.  
 
The average non-performing loan (NPL) ratio for the four big State-owned banks – ICBC, CCB, BOC and BOCOM – is now 3.3 percent, compared to more than 22 percent at the end of 2003.  
 
The nation’s 12 joint-stock commercial banks now have an average NPL ratio of 2.8 percent, in contrast with 4.22 percent at the end of 2005 and 16.62 at the end of 2001, according to statistics from CBRC.  
 
“Corporate governance is of vital importance in the financial sector,” said Li Weian, professor and director of the Research Center of Corporate Governance with Nankai University.  
 
The research center has introduced a corporate governance index to help the government better supervise listed companies and protect investors’ interests.  
 
“The index will help ensure rational investment,” Li said.  
 
The country’s banking regulator said it aims to further improve bank corporate governance through four measures, including enhancing internal controls and risk management, setting criteria to evaluate corporate governance, enforcing a clear responsibility and accountability system and raising the level of transparency in the banking sector.

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