Banking on change

Speaking on his mobile phone, a Beijing-based bank’s IR officer says he’ll talk about challenges facing his colleagues in China’s banks – on condition of anonymity. ‘There are handicaps such as rules of communication and disclosure,’ he begins. ‘But I think the ideological handicap may be the largest.’ Ideological handicap? Patiently, the IRO explains: ‘Chinese banks, especially the state-owned banks, are developed from a central-plan economy. They have not completely realized the importance of relationships with investors, whether they are strategic or public. Actually, more and more of China’s bankers see this importance, but the senior managers of Chinese banks still follow their original understanding. This is the ideological handicap for a Chinese bank’s overseas IPO.’

A slice of the pie
The stakes are high in China’s banking sector, with some bank issues ranking among the largest IPOs in history. In October China Construction Bank’s IPO in Hong Kong (about US$8 bn) was billed as the world’s biggest IPO in four years – and the bank is only China’s third-biggest lender. 

This isn’t just about dollars, either. It’s about national security. China can’t grow into a superpower without a functioning banking system, one that directs capital to the most productive areas of the economy instead of wasting it on bad loans and corruption. In that sense, China’s banking IROs will help shape their country’s future.

Of course, from an investor’s standpoint, China is just a growth story – one unparalleled since the industrialization of the US. So when more massive bank IPOs hit the market over the coming months, most buyers will be so eager for a slice they will overlook things – important things, like internal control deficiencies that have forced the government to repeatedly bail out the banks. 

Once investors buy their stake, however, they’re bound to start ‘kicking the tires’. So when that bank IPO is done, and senior managers drop their IR roles to resume their focus on operations, what then? That’s when it gets tricky, admits a US investment banker familiar with Chinese IPOs. ‘Really, the onus is on IR officers,’ he says. ‘They’re the point people who take the brunt of investor frustration if investors perceive a continuing lack of transparency.’ Foreign investors will have other concerns, too, such as the heavy hand of a government used to Soviet-style five-year plans.

Still, the IRO will have some selling points. While the US banker doubts the banks will be adequately restructured for IPOs, Welkin Chen, a financial analyst and risk manager based in Shanghai, understands their attraction for investors. ‘The western world has market saturation and heated competition,’ he explains. ‘In other developing areas, there’s either no such potential or countries are at risk.’ As for China’s banking scandals, Chen says they ‘lower the stake cost for the international financial giants acquiring local banks.’

Investors may also be reassured if a newly listed bank has at least one director from the western banking sector. Either way, they’ll press Chinese IROs toward familiar standards of disclosure. And they won’t care that Chinese IROs face more obstacles than their colleagues in the West – which they do.

A long road ahead
‘The underlying story is that companies are currently putting junior people through training,’ explains a western reporter covering IR in China. Like most others close to this story, this reporter asked for anonymity on what he calls ‘a very sensitive issue’.

‘They’re asking people with better English to try to understand what IR is about,’ the reporter adds. ‘And these people go back to the ranch and say, We’ve got to do x and y. But it’s the nature of Chinese companies that this is unlikely to reach senior levels for a while, so it’s going to take time before the firms adopt best practices in IR.’

Whether this is an ideological barrier or an institutionalized hierarchy, it’s depriving companies of full use of the talent at their disposal. ‘You’ve got two types of companies here,’ continues the reporter. ‘One type has hired experienced IROs from the West; I’ve met a few of them and they’re absolutely tip-top at their job. But then you wonder how they win support from their board to get on and use their skills.’

The second kind of company, he says, has chosen to develop IR in-house. ’At the moment, they’re still sending relatively junior people out on educational events,’ he notes. ‘So these people learn the theory and a lot of the good practices they’ll need. But the issue is how they convince their companies – because, after all, they’re junior people. So they have a similar problem, though it’s probably more frustrating for western IROs. Similarly, a lot of the top-class financial PR firms are in China now and they’re also offering excellent advice to their clients, but I’m not sure it’s always being taken up.’

Leaders and laggards
The investment banker sees less senior management resistance in some of the other Chinese sectors going public. ‘Some of the major Chinese companies bring on board quite skilled local people with western experience – they can hit the ground running relatively effectively,’ he says. ‘But in more institutionalized firms these people struggle far more with changing the culture and mindset.’

In the banks’ defense, the Beijing-based banking IRO says they pay more attention to IR. ‘There are far fewer companies outside the banking sector that have set up an IR function, even among those [firms] listed in the US market,’ he says.

There are also differences between banks. For example, Shanghai-based Bank of Communications (BoComm), the country’s fifth-largest bank, is thought to be more modern than the big four banks, and was the first to list abroad. Zhu Kepeng, director of the board of directors’ office, heads investor relations at BoComm. When his pioneering team prepared for the IPO, Zhu says one of its key tasks was ‘a full understanding of the key concepts of IR, especially from the strategic management and corporate governance perspectives of the bank.’ It also had to ‘build a communications platform with investors in no time at all, so the IR team could perform in an effective way.’

‘In no time’ is right. True, there are other Chinese firms hurrying to market but banks have a deadline – and it’s fast approaching. China’s financial services open to full global competition at the end of 2006, a condition of China’s membership of the World Trade Organization (WTO). Already, foreign banks are piling in, and China’s major banks are rushing to restructure and list, just to stay in the game.

That puts the banks in a media spotlight, where assessments can be blunt. As Hong Kong-based governance commentator David Webb says, ‘It is premature for the big four mainland banks to be seeking listings. The bail-out of bad loans has temporarily pumped out the floodwaters, but there is still no roof on the house.’

High stakes, lack of clout, media attention: that’s a lot to handle when you’re new to IR. ‘These banks are huge institutions with a very complex set of circumstances,’ notes the investment banker. ‘But transparency is required when you become a publicly listed company. And investors will have certain demands the company isn’t used to accommodating, so IROs will need to be sensitive to both cultures and build bridges instead of obstacles.’

Full steam ahead
With its IPO behind it now, Zhu’s team at BoComm is still running hard. ‘Building on international IR best practice and valuable experience from international companies such as HSBC, we’re trying our best to establish a customized system in a very short period of time,’ Zhu comments. ‘At the same time, we realize that an integral set of IR rules and policies can help us standardize this complex process, increasing the efficiency of our IR activities.’

So what would make things easier for IR workers at banks going public? ‘We need more chances to meet foreign investors,’ says the Beijing-based banking IRO. ‘We need to understand their concerns and requireparticular market rules and other conventions.’

While the IR reporter agrees Chinese bank IROs get scant exposure to foreign investors, he attributes this to management fears based on some recent ‘disasters’, such as China Life Insurance. It went public with a bang in 2003. Its $3.5 bn share offering was the largest in the world that year and sold out 25 times over. But the wheels soon came off. Now China Life is facing an SEC investigation and a US shareholders’ lawsuit, having failed to disclose – prior to its share sale – a government audit revealing accounting irregularities at its parent firm.

Unfortunately for Chinese bank IROs, they’re still short on financial data, which adds risk to the otherwise critical meeting with prospective investors. ‘There’s very little point in meeting a foreign investor or foreign analyst until you’re 100 percent secure about your story,’ says the IR reporter. ‘China Life shows that in spades.’ 

Still, the Beijing IRO feels a need to get out there. ‘In addition to relying on external consultants, the most efficient way to respond to the challenges is to send China’s banking IROs abroad to understand the market rules and foreign investors’ concerns and requirements,’ he points out. And he expects this to happen ‘only after more senior management realizes the importance of the investor relationship.’

In the meantime, he and his colleagues can only hope foreign investors understand what they’re up against. ‘It will require more patience and effort from foreign investors who wish to harvest a return from investing in China’s banks,’ he concludes. Perhaps more patience and effort will also be required from these pioneering IROs.

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Andy White, Freelance WordPress Developer London