Founded in 1996 and headquartered in Beijing, China Minsheng Bank Corp. (CMBC) is the first nationwide joint stock commercial bank with non-state-owned enterprises as shareholders. Over the past decade of development it has become a leading player in China’s banking sector. Faced with heated competition from four big state-owned banks that have lately begun to introduce strategic foreign investors, and from the aggressive initiatives of international banking groups, what specific strengths, in management and strategy, does CMBC have to take on challenges at home and abroad? With these questions in mind, Wharton management professor Marshall Meyer held a dialogue with Shao Ping, vice president of CMBC, at the bank’s Shanghai branch office on April 18, 2006. During the talk, Shao also expressed his ideas on the reform of China’s banking industry and on the revaluation of the RMB. Following are excerpts from the interview.  

Meyer: In the past 10 years, CMBC has emerged as the largest private commercial bank in China. How was this accomplished?

Shao Ping: Back in 1996, when CMBC was founded, it was the very first joint stock bank with non-state-owned shareholding. Therefore, ever since its birth, it has had a mission to reform China’s joint stock banks.

There are two factors that account for the success of CMBC — an external factor and an internal factor. The external factor is that the past decade has been a booming period in China’s economy and the country has achieved remarkable results due to recent reforms. CMBC has had some good opportunities.

Regarding the internal factor, there are several aspects to it. First of all, CMBC has been clearly differentiated from state-owned banks since its birth. We have a sound structure of corporate governance with clear-cut asset structures and responsibilities. Secondly, CMBC has been adhering to the principal of innovation, including management system innovation and human resources innovation. For example, when evaluating the performance of the board of directors and senior management, we have adopted a two-rate motivation system, which combines profit-salary rate and profit-result rate. We are the first one to take this initiative among all commercial banks in China. At state-owned banks, the headcount and salaries are allocated by the state. Our motivation system makes us able to attract real talent. We have a young team — the average age is 31 — which is energetic and full of innovative ideas. They have done a lot of work on service innovation under such an effective motivation system.

The board of directors of CMBC is on course to establish a bank where the most crucial know-how is innovation. Our fast development and achievements in the past decade contribute to, and benefit greatly from, innovation.

Meyer: Can other banks learn from your experiences?

Shao Ping: Competition in the banking sector today is extremely fierce. Many of our innovative strategies are the first of their kind in China and some of our approaches can be shared by other banks, such as the two-rate motivation system, data centralization, independent evaluation system and independent auditing system.

Meyer: You mentioned data centralization: Does CMBC have a single data center for all of its branches?

Shao Ping: Yes, we have only one general ledger in the headquarters in Beijing. Every branch does not have its own database. Data centralization does provide us a better platform to develop management accounting systems and customer relationship management (CRM) systems. More than copying from western banks, such a strategy is a combination of both borrowing from foreign counterparts and being innovative [in ways that go against typical] Chinese practices. However, other domestic banks have also learned a lot from western banks. Competing in the same marketplace, our edge is that we are the “first mover.”

Meyer: You mentioned corporate governance and HR policy. What advantages do you have in your daily business?

Shao Ping: Our business model is to build everything around the customer; our core idea in management is to create value for customers. The business operation is market-oriented and customer-oriented. We are now actually reshaping ourselves from a department-bank into a process-bank, where the former sets up many functional departments and the latter is based on better serving customers’ needs.

Meyer: So it’s very much focused on the customers and an entire array of customer needs. Is this the same pattern adopted by the local private banks?

Shao Ping: Yes. In fact, the very concept of reshaping from a department-bank to a process-bank was first proposed by Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC).

Meyer: Really, the regulator proposed this?

Shao Ping: Liu used to work in the commercial banking industry. He is a specialist regulator and has quite unique opinions and perspectives on bank operations in today’s more open market. He actually proposed this idea when he was visiting CMBC.

Meyer: In December, foreign banks will be allowed to conduct RMB business under provisions of China’s agreement with the WTO. How will this change the Chinese banking industry? And what will CMBC do?

Shao Ping: We have taken two measures: The first one is our human resources strategy. We are going to raise the bank’s core competency by upgrading the whole team’s general quality. One of the programs was started two years ago. We sent senior management staff — like presidents of branches and general managers of headquarter departments — to take an [18-month] training course in Europe and the United States sponsored by IFC. The other project was started last year, which is to train 1,200 to 1,500 senior management staff in a three month program, like directors of sub-branches and presidents of branches, at either Nanyang Business School in Singapore or Hong Kong Chinese University. We chose these two locations mainly because both Singapore and Hong Kong have mature financial markets, sound education organizations and well managed banks for us to learn from. This project has been running over a year and has shown very rewarding outcomes.

Secondly, we are in the process of transformation. Our past 10-year development has created a model which we believe still needs upgrading. In order to take on the challenges of marketization and competition in the open financial market, we have made changes from our traditional way of operation — a three-tier system involving headquarters, branches and sub-branches — towards the direction of professionalization. For instance, in our real estate business, we have organized expert teams consisting of account managers and real estate specialists to provide more professional services to our target customers, thus broadening our market share, stabilizing our customers and improving our returns.

We plan to finalize this transformation in two or three year’s time. We are positioning ourselves to serve small- and medium-sized enterprises (SMEs) and retail customers. Today, China is facing a good development opportunity. The Yangtze River Delta, Pearl River Delta, Bohai Sea Ring Region and Economic Belt along the Yangtze River are the most developed places with the most active financial resources. These are the places our profits will come from in the future as more middle and rich classes emerge. They are also the best markets for retail banking businesses. We will launch more credit cards, and individual loan and housing mortgage businesses in the future.

Meyer: Will foreign banks be able to adopt the same strategy?

Shao Ping: China is such a big territory with a huge market that the number of outlets for newcomers is far from enough. They look on high-end customers, while we focus more on the customers in the middle. There is a difference between our target customers.

Meyer: Compared with state-owned banks, what are the advantages of CMBC?

Shao Ping: First of all, we have a concise and capable team. Secondly, we are equipped with effective risk management and good asset quality. More importantly, our corporate governance structure is far more professional than the competitors’.

Meyer: Let me pursue the issue on non-performing loans (NPLs), if I may. I understand CMBC has a very low NPL ratio. How have you kept it so low?

Shao Ping: We have a different risk management system. Traditionally, the loan approval is authorized by executives at various levels — from headquarters to branch to sub-branch — who have formed a Loan Approving Committee. Such a practice was adopted for the first five years, which resulted in a two-digit NPL [number]. At the end of 2000, we changed to a different loan reviewing system, where all the executives on the loan committee were replaced by specialists directly appointed by headquarters. The appraisal, HR management and remuneration of these members are directly and vertically managed by headquarters and thus are separated from all branches.

Meyer: In other words, you have centralized the process of reviewing loan applications.

Shao Ping: At the same time we are also improving our loan reviewing skills to ensure both results and efficiency. In terms of marketing, we are constantly renovating sales and marketing to develop target customers and to ensure our customers’ high quality.

Meyer: What about the Bank of China, ICBC and CCB, which will take or have received large investments from foreign banks? Will they be able to centralize their loan process?

Shao Ping: This takes time. Changing the whole team’s mentality … needs a process.

Meyer: Some of my academic colleagues believe that NPLs in China will actually increase this year or next. Do you believe that will be the case?

Shao Ping: I share the same perspective on this issue. Our economy keeps growing at a speed of 9%. Due to the irrationality of the industrial structure, we will have to go through a period of adjustment.

Meyer: What will the People’s Bank of China (PBOC) or CBRC do about this?

Shao Ping: The economic adjustment and control by the central government are now becoming more scientific in order to avoid drastic fluctuations. This is good news for the banking industry.

Meyer: Is there any chance that some banks will require additional injection of capital?

Shao Ping: According to the Basel Agreement, the Capital Adequacy Ratio (CAR) is the most crucial criterion. Nowadays, Chinese banks are also changing their way of doing business towards projects involving less capital consumption. These regulations are new but important requirements for Chinese banks and they are also the major reasons for our current transformation.

Meyer: The U.S. government has pressured China to allow greater convertibility of the RMB, and from what I read, China may accommodate this. In your view, is greater convertibility of the RMB a threat to the liquidity of Chinese banks?

Shao Ping: As for the RMB exchange rate, I think that the U.S. has turned it into more of a political issue. As a matter of fact, from the perspective of financial experts, over-appreciation of the RMB does not benefit China, the U.S., or the whole world. The central bank has already put RMB convertibility into a controlled floating exchange rate mechanism, and exchange rate reform has already been started. Westerners should recognize the remarkable progress that China has made so far on this issue.

I think the currently adopted basket monetary policy is very wise, because it has embodied its goal of economic globalization. Along with economic and trade development in Asia, as well as the ever increasing business between China and the rest of the world, our exchange rate should be influenced by one-basket currencies, rather than the U.S. dollar alone. The Chinese government will make adjustments from time to time to the monetary policy based on changes in the economic and monetary market. However, these changes are not the result of pressure from the U.S.

There are many reasons for the Sino-U.S. trade surplus. China gets very little by selling made-in-China products to the U.S.

There is inequality in the strengths brought into play in Sino-U.S. trade. China’s strength is its relatively cheaper labor force, while the strength of the U.S. is its high level of technology.  However, due to political reasons, the U.S. government does not allow the export of high technology products to China, and this has caused the imbalance. The RMB issue was generated by politics and is now operated by politics.

Meyer: What is your vision for CMBC 10 years from now?

Shao Ping: In 10 years time, CMBC will be more internationalized, closer to the standard of first-class world banks. This will be shown in four aspects that I often mention: sound operational performance, standard internal management, rational business structure and effective risk control.

Meyer: In your vision, will CMBC expand into new businesses — for example, investment banking?

Shao Ping: As far as I know, the banking regulation policy in China will [bring about] some changes gradually. Our ultimate objective is to pursue the maximization of market value and to give returns to the shareholders and society.