Global Capital Markets

Banks in China are a lynchpin of the emerging capital market. If they are steeped in cronyism and politics, companies hungry for loan capital have to play that game. Governance watchdog webb-site.com, for instance, just lashed China Construction Bank, “Sure, they've taken the bad loans out of the bank, but what about the bad lenders? Do you really believe that thousands of semi-autonomous branches have suddenly discovered the art of credit analysis and that the local Communist Party cadres and bribe-waving wannabe tycoons will leave them alone to make good lending decisions?” No wonder investors such as the International Finance Corp. are applauding the China Banking Regulatory Commission (CBRC) for taking steps two weeks ago to energize bank boards as real overseers. The agency’s guidelines on director responsibilities call on boards to exercise “independent” supervision of management. Recommendations break ground by requiring audit committees to be part of the board, rather than controlled by the supervisory council, often packed with state bureaucrats or communist officials. And they require new safeguards against insiders pulling strings to favor cronies. CBRC calls the rules “guidelines” but expects to treat them as mandatory. The test is what regulators do to enforce them.