By Yuan Zhaohui, Li Liming
Published: 2008-02-22

From cover, issue no. 355, February 18th, 2008
Translated by Zuo Maohong
Original article:

The Agricultural Bank of China (ABC) has plans to become a commercial banking group and seperate its policy-oriented agricultural financing services from its main operations, according to sources. 

Sources familiar with the Bank's reform plan said it would be splitting its services into agriculture and non-agriculture, with both having independent managements.

Sources close to the reform plan said it received preliminary approval before the Spring Festival but would ultimately need approval from China's two highest legislative conventions in March. 

Meanwhile, lawmakers are still ironing out differences over the splitting of commercial and policy functions within the bank.

Scheme Gradually Unveiled
At a national financial conference held one year ago, the fundamental priorities of ABC's reforms were set as: to deal with the "three agricultural problems", namely, rural areas, farmers and agriculture; to introduce overall structural reforms; to operate in a commercial mode; and go public when appropriate.

According to a senior official who was engaged in drafting the reform, the ABC would be turned into a banking group. He added its subsidiaries would include a commercially operated holding company to be named Agricultural Bank of China Company Limited and another institution focusing on agricultural and farmers' needs in the rural areas.

The source said under this framework, the former would be targetting for market listing, while the latter's chance to become publicly listed was still under debate considering that it enjoyed government subsidies.

The agricultural-based services would also be reformed, added the source, saying that agro-financing would be developed in accordance with market economy instead of the government-administered model of the past. 

The ABC's 2006 annual report showed that 60% of its branches and 51% of its employees were located in county-level administrative regions, and by the end of 2006, agriculture-related loans and those offered by county-level branches totaled 1.7 trillion yuan--55% of all loans that year.

The ABC's management believed that it was on par with the other three major state-owned banks to compete in the more developed coastal regions. For example, in Suzhou of east China's Jiangsu province, ABC has had more market share and higher profits than the other three.

As the backbone of China's rural banking system, the ABC would require approval from various related agencies before it could implement the reform scheme, including the Ministry of Finance (MoF), its former investor; the central bank, the coordinator of state bank reform; the China Banking Regulatory Commission (CBRC); the National Development and Reform Commission (NDRC), the Ministry of Agriculture (MoA), and the Central Huijin, which would inject 40 billion yuan into the ABC.

A source close to regulators said the above agencies had given preliminary approval to the scheme before the Spring Festival, and that it would be publicized if passed by the two highest legislative conventions in  March--the National People's Congress and the Chinese People's Political Consultative Conference.

After all the Efforts
When he visited Gansu province in late November last year, the Bank's president Xing Junbo noted that it was their obligation to support agricultural issues. By October, the Bank had already established "trial bases for agricultural banking services" in seven provinces, including Gansu and Sichuan.

Chen Xiwen, head of China's rural work office, said recently Chinese banking institutions were focusing more on the urban areas. He stressed the needs for ABC to have a special mission in developing rural areas.

However, commercial banks could not ignore profits, he said, as the ABC needed to maintain solid performance in order to satisfy its shareholders after the reform. He added the government should provide preferential policies for ABC in view of the demands placed on the bank to promote agriculture.

Early in mid 2007, the Central Huijin had decided to invest 40 billion dollars in the Bank, but to wait for the latter's reform scheme to be publicized before going ahead with it. In the first half of 2007, regulatory bodies, including the central bank, the NDRC, the MoF, the CBRC launched an investigation into the reform and wrote research reports to serve as the basis for reforms.

After resigning from the central bank and being appointed as president of Agricultural Bank last July, Xiang Junbo shifted the Bank's first priority to jumpstarting reforms as soon as possible. Late last year, the central bank president Zhou Xiaochuan revealed that the Bank's reforms had entered a decisive phase. As rumors about the reform spread, Bank spokesman Zhou Qingyu replied on February 3rd that the scheme was still being studied.

Based on the experiences of the other three state-owned banks, which have already been reformed into holding companies, if the scheme was approved by the two sessions, ABC would be able to restructure its financial mechanism, introduce the shareholding system and strategic investment, and go public.

Sources said the bank had employed Central Huijin, CITI Securities and two auditing teams to prepare for its domestic IPO; while Morgan Stanley had been shooting to work on its overseas IPO.

Disagreement Remains
Sources said disagreements remained, mainly on how to ensure both commercial operations and support for agriculture.

To better serve agricultural issues, the banks worked out the "Implementation Scheme of Serving the Three Agricultural Problems" last year. According to that scheme, funds raised by county-level branches would mainly be used for agricultural purposes and economic development of the county; with main services covering agricultural production, small and medium rural companies, modern agriculture, infrastructure of rural areas, and development of small towns.

The above-mentioned senior official voiced his concern, saying, "whether there will be risks after a separate agricultural service is established remains an unsolved question."

There have been relatively few customers in rural branches. In recent years, with many branches having focused on deposits, debt collection, and intermediary services, their credit management teams have been dismissed, leaving most of them simply "deposit institutions".

"It's still not clear how the agricultural service will operate," said the above source. In their opinion, wholesale services may be an option, as "there are already many grassroots organizations, such as rural credit cooperatives, small banks at the village and town level, and micro-credit companies. The bank could provide them wholesale loans and let them do the job instead."

"The biggest problem lies in strategy rather than management," said an official of one supervising agency, adding that even if the decision makers agreed on the scheme, the contradiction between agricultural issues and commercial operations persisted. Its goal of "serving the three agricultural problems" might lead to losses, making the Bank a burden for the government.