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Stanford GSB News

 

Commercial Bank of China Grows Its International Reputation

March 2007

STANFORD GRADUATE SCHOOL OF BUSINESS—The president of the world's third largest international bank was careful not to say much when asked about the recent falloff in stock prices during a visit to the Stanford Graduate School of Business March 5.

Yang Kaisheng"This is a question that should be answered by an economist or a banker like myself very easily," said Yang Kaisheng, vice chairman and president of the Industrial and Commercial Bank of China, through a translator. "However, now I'm president of a listed bank, so this becomes a very tough job."

Lawyers and media consultants have warned Kaisheng to be extra careful with his public statements since October of last year, when stock in the Industrial and Commercial Bank of China, also known as ICBC, went on sale in Shanghai and Hong Kong. It was the world's largest initial public offering (IPO) and first-ever simultaneous listing on the Shanghai Stock Exchange and Hong Kong Stock Exchange, an event Kaisheng described as "both big and beautiful." ICBC chose Hong Kong rather than New York for its IPO because Hong Kong is cheaper, he said.

As for the Chinese stock market, Kaisheng said he is "quite confident" of its healthy development, noting that the international capital market also suffered a drop recently. Perhaps most notable about the downturn is that the Chinese market is no longer insulated from what happens internationally, and vice versa, he said.

Kaisheng's speech, sponsored by the business School's Greater China Business Club and the University's Center for East Asian Studies, outlined ICBC's formidable market position. As of last summer it had $882 billion in assets, $433 billion in loans, and $765 billion in deposits. ICBC is China's leading corporate and retail bank, mortgage lender, and online banker, and only Citibank and Bank of America are larger in the world. Since 1999, ICBC has been on an aggressive reform schedule aimed at diversifying its revenue mix, improving efficiency, and centralizing operations. Change is ongoing, thanks in part to ICBC's partnerships with Goldman Sachs Group Inc., Allianz Insurance Group, and American Express Co., he said.

Reform never ends, Kaisheng said. Goldman Sachs will continue to help ICBC develop its corporate structure, risk management practices, and other operating issues. Allianz Insurance Group will offer various insurance products to ICBC customers, and American Express has launched an ICBC ATM card.

The Chinese government is still the major shareholder of ICBC, controlling about 70 percent of the bank's shares. Of its 14 directors, Goldman Sachs holds one seat, and three others are reserved for independent members. This is an appropriate structure for the bank, Kaisheng said, assuring the audience that foreign directors play a very active role in ICBC's decision-making process.

In preparation for its IPO, the bank dramatically reduced its non-performing assets and loans. When asked how the bank did this, and whether it could withstand further adjustments in a potentially overheated Chinese market, Kaisheng said ICBC has a track record of predicting changes in the economy. For example, when the steel industry experienced a drop in 2000, ICBC had already reduced lending in that sector.

The audience asked several questions about banking reforms in China and the effect they might have on ICBC. A rise in the nation's Yuan Renminbi currency won't have a tremendous impact because the bank has already converted funds into local currency, Kaisheng said. If Chinese banks are required to increase reserves, it would likely create business for ICBC, which can easily put more cash in a reserve account. Other banks will have a hard time increasing reserves, and will likely have to borrow from ICBC, he said.

The potential for debt markets to grow in China will also be good for ICBC. While private customers might take money out of savings accounts to buy bonds, the companies selling bonds will likely deposit that money back with ICBC, Kaisheng said. A developed bond market will also give ICBC more ways to invest its own money and diversify, he said.

—Sarah Ruby