After the Industrial and Commercial Bank of China (ICBC) successfully listed on the Shanghai and Hong Kong stock exchanges, three out of four state-owned commercial banks on the mainland are now listed.  Several questions arise from this move: How have these listings impacted China's banking development?  Does this indicate that they have transformed themselves into market-oriented operations?  And, perhaps more importantly, can privately-held banks and private financing be considered legitimate?

As a result of market segmentation, outdated information systems, and relatively scares financial resources, many privately-held companies (particularly small- and mid-sized enterprises, or SME) have been unable to satisfy their financial demands for many years. Consequently, enormous market demands have given rise to private banks.  These private  organizations have helped relieve the financial constraints many SME faced during the course of their economic development, and have played a significant role in promoting private economic development as well.  However, they still have not been granted equal status with state-owned institutions.

Once state-owned commercial banks are listed both at home and abroad, private and foreign enterprises can become shareholders.  Foreign-funded banks can also operate comprehensive Yuan business. Given these circumstances, the China Banking Regulatory Commission (CBRC) should work on standardizing and treating private banks and financial organizations as it does state-owned banks.  This not only opens the door to private capital to strengthen involvement with the financial sector's development, but will also accelerate the optimization of China's financial market.

So, have state-owned commercial banks realized market-oriented operations?

Not yet.  State-owned banks have long served as a tool allowing the government to exercise macro controls.  It will take time to determine whether state-owned banks' listing will usher in more market-oriented operations.

Like many Chinese banks, ICBC relies on deposit and loan interest margins as its main sources of income.  The contribution of non-deposit and loan business income on average accounts for no more than 10% of total revenues.  This contrasts sharply with the revenues of international banks, 50% of which on average comes from non-deposit and loan business.  Excessive liquidity and a seeming inability to increase the contribution from non-deposit and loan business to total revenues makes it difficult for ICBC to realize the investment rate of 16% for its shareholders.  To achieve this, the bank is expected to continue expanding its credit business, and to raise the ratio between loans and deposits.  However, the government retains macro controls.  As China's biggest state-owned commercial bank, will ICBC prioritize corporate profitability and investor returns, or the execution of government policy?  This has become an burning industry question, and a dilemma faced not only by ICBC, but also by the Bank of China, China Construction Bank, and other state-owned banks upon listing.

The government retains its stakes in state-owned commercial banks once they list, and thus it plays the role of largest shareholder in guiding the banks' development, operations, and decision-making processes.  People with administrative backgrounds still occupy senior executive positions in these state-owned banks, and they guide  senior management in prioritizing government policy and social benefits, economic and market profits, and market-oriented operations.

The listing of Chinese state-owned commercial banks are constructive moves, mainly because they raise banks' capital sufficiency rates.  However, how to implement market-oriented operations and prioritize benefits of shareholders and stakeholders as key operational objectives will require more thorough reforms in the future.