Contents Chapter I Starting Point – Carving out an Independent Financial System from the State Treasury Section I Launch of Reform and Opening Up 2 I. Reflecting on the Path of Economic Development 2 II. Sounding the Clarion Call for Reform and Opening Up 6 III. Laying the Theoretical Foundation for Socialist Economic Structural Reform 8 IV. Setting the Goals for Building a Socialist Market Economy at the 14th CPC National Congress 10 V. Economic Reform Called for Banking Reform 12 Section II Banks Emerged as Main Channels of Investment and Financing 17 I. Diminishing Fiscal Inputs 19 II. Issuing Government Bonds and Tapping Foreign Capital 22 III. Bank Financing Inevitably Overtaking Fiscal Appropriations 23 Section III Institutional Reform as Starting Point of Financial Reform 31 I. Reopening and Establishment of Specialized Banks 32 II. Birth of Joint-Stock Banks 38 Section IV Bank Reform Invigorated the Economy 40 Chapter II Impetus for Reform – Financial Sector Remediation and Surfacing of Non-Performing Assets Section I Macro-Finance and Governance 47 Section II The Non-Performing Loan Quandary 55 I. Crisis in Bank Asset Quality 55 II. Direct Causes of NPAs 69 III. Root Causes of NPAs 101 Section III Early Explorations at Reform 108 I. Bringing Corporate Approaches to Specialized Bank Operation 109 II. Separating Policy-Based Lending from Commercial Activities 111 III. Promulgating Banking Laws 114 IV. Transforming the Operating and Management Philosophy of State-Owned Banks 115 Chapter III Responding to Crisis – The Asian Financial Crisis Ushered in a New Round of Financial Reform Section I The Asian Financial Crisis 120 I. Financial Turmoil in Southeast Asia Under the Speculative Attacks of International Capital 120 II. Lessons Learned 123 Section II The First National Financial Work Conference 131 I. Drafting the Blueprint of Financial Reform 136 II. Significance of the First National Financial Work Conference 140 III. Joint-Stock Reform of State-Owned Banks: The Conference’s Neglected Topic 144 Section III The Five Pillars of Deepening Reform 147 I. Centralizing the Financial Regulatory System 147 II. Establishing the Industry-Segregated Operation and Management Framework 151 III. The First Round of Capital Injection 153 IV. Assessing the Loan Situation and Implementing the Five-Category Classification Scheme 159 V. Establishing Financial Asset Management Companies and the First Round of NPL Divestiture 166 Chapter IV Breakthroughs in Joint-Stock Reform – Finalization of the Path and Proposal of the Joint-Stock Reform Section I Theoretical Studies and Breakthroughs 184 I. Discussions and Controversies of Choosing a Path for Joint-Stock Reform 184 II. Theoretical Breakthrough at the National Level 193 Section II Finalization of the Path for the Joint-Stock Reform of State-Owned Banks 201 I. Favorable Timing and Conditions 201 II. Reform Urgent Amidst Changing Landscape 217 III. Final Decision: Holding of the Second National Financial Work Conference 222 Section III Regulatory Reform Creating Conditions for the Joint-Stock Reform 232 I. New Arrangements for Financial Regulatory Reform 233 II. Establishment of the CBRC 234 Section IV Formulation and Implementation of Joint-Stock Reform Plans of State-Owned Banks 237 I. No Agreement on the RMB 970 Billion NPL Divestiture Plan 238 II. Experimental and Exploratory Efforts 249 Section V Release of the Plan for the Joint-Stock Reform 280 I. A Report to the State Council 280 II. Follow-Up Discussions and Refinement 307 Chapter v Launch of Pilot Reform – Joint-Stock Reforms and IPOs of CCB, BOC, and BoCom Section I Establishment of Central Huijin and Capital Injection 315 I. Establishment of Central Huijin 315 II. Capital Injection with Foreign Reserves 321 III. Discussions and Debates 323 Section II Joint-Stock Reform and Listing of CCB 329 I. Preparations 331 II. Financial Restructuring and Establishment of the Joint-Stock Company 341 III. Involvement of Foreign Strategic Investors 362 IV. Public Listing 370 Section III Joint-Stock Reform and Listing of BOC 374 I. Becoming One of the First Pilot Banks for Joint-Stock Reform 376 II. Financial Restructuring and Establishment of the Joint-Stock Company 387 III. Introduction of Strategic Investors 394 IV. A Challenging Journey to Listing 403 V. IPO 409 VI. Significance of BOC’s Joint-Stock Reform and Listing 413 Section IV Advancing the Joint-Stock Reform of BoCom 415 I. Unique Features of BoCom’s Reform 416 II. Financial Restructuring 429 III. Engagement of Foreign Strategic Investors 443 IV. Listing in Shanghai and Hong Kong 453 Section V Accusation of “Gross Underpricing” of State-Owned Banks 468 Chapter VI Expansion and Conclusion – Joint-Stock Reforms and IPOs of ICBC and ABC Section I Joint-Stock Reform and IPO of ICBC 476 I. Sounding a Strong Prelude to the Joint-Stock Reform 481 II. Innovative Joint-Stock Reform Plan Based on the “Special Joint Fund” Account 505 III. Financial Restructuring, Group-Wide Restructuring, and Introduction of Strategic Investors 514 IV. ICBC’s “IPO of the Century” 531 Section II Joint-Stock Reform and IPO of ABC 541 I. The Uniqueness of ABC’s Joint-Stock Reform 542 II. Four Revisions of the Joint-Stock Reform Plan 557 III. Financial Restructuring and Creation of the Joint-Stock Company 563 IV. Innovative Introduction of Strategic Investors 571 V. ABC’s IPO 573 Chapter VII Strengthening the Foundation – Development of Corporate Governance and Internal Risk Controls in Major Commercial Banks Section I Development of Corporate Governance Systems 587 I. Building an Effective and Accountable Governance Structure 589 II. Developing a Sound Corporate Governance System and Mechanism 611 Section II Development of ERM System 625 I. Developing Robust RM Culture 626 II. Creating Sound RM Frameworks 628 III. Building Rigorous Delegation and Limit Management Systems 632 IV. Building Empirical Risk Identification and Measurement Systems 637 V. Creating Effective Risk Monitoring Systems 646 Section III Development of Internal Control System 647 I. Defining Organizational Structure of and Responsibilities for Compliance Management 649 II. Building Compliance Systems and Mechanisms 651 III. Identifying Responsibilities for and Handling of Risk Events and Violations 652 IV. Boosting Compliance Culture and Awareness 655 V. Establishing ICC Methods to Improve Risk Control Capability 656 VI. Facilitating Efficient Internal Control Management 658 Chapter VIII Post-Reform Rejuvenation – An Analysis of the Effectiveness of the Joint-Stock Reform Section I Post-Reform Rebirths of Major Banks 663 I. Transformation of Operating Model 663 II. Pillars for the Real Economy 687 Section II The Financial Cost and Benefit of the Joint-Stock Reform 698 I. Evaluation Framework 699 II. Cost-Benefit Analysis 701 Epilogue 713 Afterword 728