China International Trust & Investment Corp (Citic), the mainland's flagship investment firm, could be the first Chinese financial group to list its shares overseas. The move comes amid greater calls among bankers to expand the capital structure of financial services groups to include foreign partners.

"The Chinese authorities may use Citic as a test case to see how the market responds to capital demands from ChinaÆs financial institutions,ö says John Hobson, banking research head for Credit Suisse First Boston (CSFB). ôPart of Citic's appeal is that is that it doesnÆt have the same large exposure to ChinaÆs state-owned enterprises [SOEs] that ChinaÆs four big banks do.ö

Citic plans to merge its banking, insurance and stockbroking businesses into a new company, Citic Financial Holdings. CiticÆs Beijing-based spokesman Chen Yi reportedly confirmed that the group plans to sell its shares overseas, beginning in Hong Kong, according to Bloomberg news agency.

Banking reform gathers pace

What a long way the reform movement has come. A few years ago the National Congress wouldn't even countenance a sale of its banking assets, now there's talk of listing entire financial operations (not just the Hong Kong units). Beijing is also moving ahead with plans to gradually dismantle the legal separation that exists between its banking, insurance and brokerage industries, spurred on by China's probable entry into the World Trade Organization later this year.

Many financial groups are already restructuring their operations, cleaning up their balance sheets, stripping out bad loans and instituting new credit practices, with state help. In the past week, ChinaÆs asset management companies (AMCs) have been wrapping up the buyout of an estimated Rmb1 trillion ($120.8 billion) of non-performing loans at ChinaÆs debt-laden big four state banks. An estimated 90% of the bad loan buyouts have been completed, a top executive at one of ChinaÆs AMCs said last Monday.

China set up four AMCs last year to tackle bad loans in the banking system last year. ôChinaÆs big banks are getting cleaned up, but debts are being nationalized," says Neil Saker, senior economist for SG Securities. "In so far as capital is concerned, we could call it a three-step process. The first round will involve the government issuing bonds to finance the AMC purchases; the second round could involve the banks themselves issuing bonds once their balance sheets are cleaned up; and then the third round could see the listing of some banks."

ChinaÆs big four banks - Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China - control 70% of ChinaÆs banking system, including problem assets. They had a combined asset base of 9.55 trillion yuan ($1.153 trillion) at the end of 1998, according to CSFB. Assuming an average loan growth of 10%, the Rmb1 trillion bad loan buyout would make up 10% of their asset base. In contrast, Citic Industrial Bank had an asset base of Rmb157 billion in 1999, according to CSFB.

Analysts warn that any move to raise fresh capital must be matched by real reform. "If they go ahead to the market for capital, without effectively restructuring the banks and their NPLs, the risk of a future clash of the banksÆ shares and the market itself will remain," says Takahira Ogawa, Asia & Pacific director of sovereign ratings at Standard & Poor's. "In other words, new capital could provide a moratorium on the problem, allowing bad loans and eventual restructuring costs to get higher."

Ogawa also cautions against getting overexcited about the potential for foreign strategic partnerships. "Strategic partnership of foreign banks are buzzwords nowadays in Asia, and in China too. But what Chinese banks want and foreign investors want from a strategic relationship could be very different, and I suspect the gap would be very big,ö he says.

Two-thronged approach

Discussions are being held at two levels. The first is about the future listing of Hong Kong units of China's financial services groups, such as the Bank of China group which is due to merge 12 entities by the end of this year. These entities include the Hong Kong units of China's big four state banks. The second area concerns the listing of mainland units. Citic could provide the model for other Chinese financial institutions to follow. The conglomerate plans to merge all its financial units, which make up an estimated 75% of its asset base. ChinaÆs State Council has yet to approve the plan, but banking analysts believe this will be forthcoming.

There are signs that the Chinese government is pushing for eventual change in who owns its banks and financial holding companies. It is allegedly mulling plans to set up a deposit insurance system this year, the Asian Wall Street Journal reported yesterday. The newspaper cited an annual report from ChinaÆs central bank that said setting up such a system is on its 2000 agenda. ChinaÆs central bank is also giving the countryÆs state-owned banks between three and four years to meet reporting standards required by publicly traded companies. This gives more credence to banking talk that eventual share sales by some of its larger entities - and even to strategic foreign partners - should be expected.