The Agricultural Bank of China (ABC) established its shareholding company earlier in January, indicating the last of the nation's Big Four State commercial banks will go public soon.

ABC faces a major challenge in following a different path than the other major lenders in attracting strategic investors.

Strategic investors were a key engine driving shareholding reform in China's banking sector the past few years, especially in overseas listing of Chinese banks.

Introducing strategic investors was essentially equivalent to asking for help from foreign investors.

When the three other commercial banks went public, they were plagued with a high non-performing loan ratio, depleted capital and poor risk management, which deterred foreign investors from China's banking sector.

Foreign investors could buy stakes of Chinese banks at discounted price since they were acting more as strategic investors. Even some Chinese lenders believed devaluating stakes was acceptable.

However, the listing of the other three major lenders (Industrial and Commercial Bank of China, China Construction Bank and Bank of China) offers some important lessons to the ABC, especially in introducing strategic investors.

Strategic investors do not come to help reform China's bank ownership structure but to make profits.

The key issue for ABC is what kind of strategic investors to introduce. Domestic banks are at a disadvantage. Industrial regulation dictates that commercial banks not be listed until securing strategic investors but such investors are almost exclusively foreign.

The result is a vicious circle in which foreign investors tend to attach too many additional conditions and guarantee requirements as prerequisites for pursuing any strategic partnership.

This practice jeopardizes domestic investors' right to invest in the banking sector.

The US financial crisis is a reminder of the importance of ensuring national financial security. While introducing foreign strategic investors is important, it is more important for the nation to consolidate its banking ownership.

So domestic investors, including financial and non-financial institutions, should be encouraged to invest in the banking sector. Domestic investment helps safeguard the nation's banking and financial systems.

Many large-scale domestic financial institutions and non-financial institutions with ample liquidity show interest in investing in the banking sector. Dai Xianglong, head of the National Council for Social Security Fund, said that the fund is keeping a close eye on ABC's shareholding reform and is prepared to purchase stakes of the bank as a strategic investor.

A wealth of available domestic investors puts Chinese banks in a better position when negotiating with foreign investors. Policymakers should try to blaze a new path in reforming the ABC's ownership, allowing in more domestic investors.

An often-cited advantage of introducing foreign strategic investment is that it can bring advanced international management experience to domestic banks. To have strategic partnership with foreign investors, however, is not the only way to gain advanced management. There could be other options. Domestic companies increasingly have more accesses to international management. China Ping An Insurance Group, for example, has employed McKinsey, a renowned international business consultancy, to help improve its management.

The current financial turmoil shows experienced foreign strategic investors, such as the Bank of America, are not necessarily more competent than domestic investors in risk control.

The author is an independent financial analyst. The article is reprinted from Shanghai Securities News

(China Daily 02/16/2009 page2)