China Construction Bank Reform Enters the Critical Stage

Deepening Reform, Strengthening Management and Accelerating Development

Today Guo Shuqing, Chairman of China Construction Bank (CCB) Corporation, at the spring workshop of the presidents of the Corporation’s branches, called on all the staffs to deepen reform, accelerate the transformation of systems and institutions, strengthen internal management, implement the development strategies and comprehensively improve the operational and management performance.

In the first quarter of 2005 the Corporation made RMB17.29 billion of pre-tax profits, growing by RMB 8.64 billion over the same period of last year and completing 32% of the year’s plan. Its NPL ratio (five categories) dropped to 3.47%. (All the numbers have yet to be audited.)

In the speech Guo stresses that at present the Corporation faces five major tasks of deepening the reform. First is to improve the corporate governance structure and establish a standard leadership responsibility system and check and balance system. The Corporation has established the framework of a new corporate governance structure, which is still in the initial form and has a long way to go to get mature. The relations among the shareholders’ conference, the Board of Directors (BOD), the Board of Supervisors and the management must be rationalized. The BOD should give full power to the management in the areas of human resources, finance, credit and risk control, including the power to nominate senior executives. The management under the leadership of the president should independently conduct daily operations, be responsible for and report to the BOD. The president of the Corporation takes the primary responsibility for the Corporation’s operation and management. The senior executives of the Corporation should practice check and balance, coordinate with each other and faithfully perform their functions. The relations among the party committee, the “three committees” and the management should be handled properly. The party committee mainly provides political and ideological leadership and support. Legal procedures should be followed to turn the opinions of the party committee into the decisions of the BOD. The party committee shall neither replace the BOD or the management in making decisions nor interfere in the normal operations and management.

He points out that the party committee of branches should also play the role of political core, ideological leaders and guarantee and refrain from imposing decisions on the management.

Second is to push forward the organizational reform and develop a market-oriented operational mechanism and internal control system. He notes that the institutional reform should comply with the requirement of establishing modern financial enterprise system, the development strategies of the Corporation, the internal control and risk management principle, the marketing principle, the requirement of scientific management and the principle of “better staff and streamlined administration”, orient towards the market, take performance as driving force, clearly define the business functions and ensure consistent responsibilities and rights and separation of the front, middle and back offices. The administrative organizational structure should gradually shift towards the enterprise structure, the official merchant system based on bureaucracy towards the completely market-oriented corporate system and the multiple branch and sub-branch system with highly fragmented operation and management towards a centralized, flexible and efficient system.

Third is to deepen the human resources management system reform and establish the incentives and discipline system targeted at all the employees. Guo says that the advanced international human resources management experiences will be introduced to build a human resources management system conducive to establishing the modern financial enterprise system and implementing the business development strategies, focusing on capacity management, driven by performance and balance of effective incentives and discipline. The “people-oriented” management physiology should be practiced to stimulate the initiative, creativity and enthusiasm of employees and give full play to the wisdom of each employee. An enabling environment for the development of human resources should be created and a harmonious and stable atmosphere should be cultivated within the Corporation. The distribution system should be reformed to set up the rewarding and punishment mechanism. Efforts should be made to get as much government policy support as possible and study the establishment of a long-term incentive plan covering the senior and middle management and ordinary employees.

Fourth is to introduce strategic investors to enhance the business development and management. Guo discloses that at present the Headquarter is contacting a number of potential strategic investors and has entered the stage of substantial negotiations. Follow-up due diligence is under way.

Fifth is to accelerate preparations to ensure the IPO this year. Guo stresses that IPO is the top priority of the Corporation and of great significance to its long-term growth. To use the fund raising, supervision and regulating functions of the capital market for the deepening reform of the Corporation, introduce the competition and monitoring mechanism and international managerial expertise and human resources are the important ways or in a sense the only way of transforming the operational mechanism and building the Corporation into a modern commercial bank.

Talking about the issue of strengthening internal management, Guo says that strict and effective internal management is not only the key to the survival and growth of banks but also the prerequisite and foundation for the secure, efficient and stable operation of the financial industry. The banking industry has its special risks and requires highly prudent and sophisticated management system. Firstly, strict discipline, regulations and rules should be adopted. The existing rules and regulations of the Corporation must be observed by each employee without any exception. Secondly, the accountability system should be improved on the basis of enhancing the job management. In particular, the accountability system for the senior executives must be improved and strictly implemented. Thirdly, risk management should be enhanced. Risk management should cover not only credit risks but also the market and operational risks and related organizational structure, policy system, decision-making system and assessment system should be built. Fourthly, cost management should be reinforced to raise operational efficiency. Effective cost control should be practiced as part of the core competitiveness of the Corporation and efforts should be made to build cost-efficiency. Each employee should establish the sense of saving cost and the senior executives should play a leading role in this regard.

In his speech Guo also called on all the staffs of the Corporation to change the operational philosophy, accelerate service and product innovation and adapt to the market economy to ensure successful reform. The advantages of the Corporation should be tapped to highlight its competitive business. The restructuring of products, customer base and marketing channels should be sped up and new growth points should be found in a bid to develop the Corporation into a world-class modern commercial bank.

Chang Zhenming, President of the Corporation, reports the execution of the comprehensive perational plan in the first quarter, analyzes the operation and management performance of the Corporation and raises the objectives to improve the execution ability on behalf of the management at the meeting.