Chinese Government's Bank Recapitalization Plan
Comes Under Domestic Fire
Premier Wen Jiabao's bank recapitalization plan for Bank
of China and China Construction Bank has come under domestic
criticism, and Wen has criticized China Construction Bank's
reform plans as inadequate.
The plan,
which was finalized last year, used China's foreign exchange
reserves to boost the capital reserves of the two banks.
Now, the plan has come under fire from members of the
National People's Congress, China's lawmaking body, which
convenes twice yearly to enact and pass new legislation.
The NPC critics say that the body was not consulted for
the major change in policy, and the government negotiated
directly with the two banks without authorization. Their
criticism is that any major policy change which involves
the country's foreign currency reserves should have gone
through a discussion and debate process before the policy
decision was made.
The issue will be highlighted during the NPC's annual
plenary session to be held next week, where the critics
are expected to say that the plan was a step backward
for the rule of law, and Wen will have to defend the policy
decision and rationale for the injection.
The government has been sensitive to criticism about
the move, often going out of its way to Chinese domestic
critics which see it as a bailout. The critics say that
the country's foreign exchange reserve's are an asset
of the Chinese people, and the government doesn't have
the right to do with it as they please without public
consultation. China foreign currency reserves currently
stand at US$403 billion.
Meanwhile, Premier Wen Jiabao is losing patience with
the pace of reforms after China Construction Bank, which
along with Bank of China, had US$45 billion injected into
it. During the National Financial Work Conference held
earlier in the month, he expressed dismay that the pace
of reforms at the bank.
Bank reforms were one of the conditions of the injection,
and Wen is obviously upset that after the restructuring,
they have not followed through with proposed changes.
The reforms would include management changes, restructuring
of the board to include foreign independent directors,
and other changes to improve corporate governance.
The goal of the injections was to help the two companies
reform their structure to become independent companies
accountable to their shareholders so that they could successfully
list on foreign markets.
Added together, it seems that all "top-down"
non-bailout bailouts have come under increased scrutiny
by the Chinese domestic press and legislative bodies.
Unless there are meaningful structural and management
governance changes made by the target companies, it will
be very hard, if not impossible, for Premier Wen to make
future injections into China's trouble state-owned banks.
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