Interviewed by Emmanuel Daniel

The Asian Banker (TAB): Agricultural Bank of China (ABC) is one of the ‘Big Four’ banks that is not very well understood overseas. I would like our conversation to focus a lot on your vision and your understanding of the most important assets of your bank.

Xiang Junbo (Xiang): I am very glad to have this interview and would like to take any of your questions. As you said, ABC is not so well understood abroad. To be more accurate, foreign investors do not know much about us compared with those Chinese banks which have been publicly listed in the overseas market. But in domestic market, we enjoy a really high reputation and good social image for our quality services in the past 58 years.

According to reforming plans approved by the State Council, ABC has been restructured into a joint-stock company on January 16th this year and our next plan is to introduce strategic investors and have an IPO. If we decide to go public abroad, we really need publicity from the world’s leading media to promote our reputation and visibility, and inform investors of our investment values. I hope your good magazine could give us such support, and believe today’s interview will be a good beginning.

After separation of non-performing loans (NPL) from within our bank, the total assets of ABC have now reached 7.5 trillion RMB ($1.1 trillion) and according to five-category assets classification for bank loans, 98% of our asset is at the high end in terms of quality.

TAB: On a consolidated basis, what is your return on assets (ROA) roughly today?

Xiang: 0.79% by the end of 2008.

TAB: For background, are you happy with an ROA of 0.79 or do you have plans in place to grow it?

Xiang: To be frank, I don’t think the 0.79 ratio is satisfactory. But we should take historical factors into consideration when looking at these types of statistics. Before the establishment of a joint-stock company, ABC used to be a specialised bank and a wholly state-owned institution which shouldered a lot of policy tasks and thus resulted in a heavy NPL burden. Such external environment has greatly impacted our profitability.

After the separation of NPLs and shareholding reform, efforts will be made to improve our corporate governance structure, reinforce risk management and finance management capabilities and further explore business markets as required by principles for shareholding banks. We will do our utmost to improve our core competitiveness and value-creation ability. Our plan for the next three years is to increase ROA to 1.2%.

TAB: ABC is the closest bank to the masses in China. So, in a sense, you are the bank that reflects the full potential of China. And around the world today, there’s a lot of emphasis on banks like ABC because there are many very large countries where agricultural banks have to be successful.

The manner in which you are successful with the rural banking community will be a great example to the rest of the world. This is not just because of your bank, but because this is the trend in the world today.

I want to start by asking you what is your big vision in terms of the three or four important goals you want to achieve for this bank?

Xiang: I think our vision is quite clear. First, like the other Big Four banks – BOC, CCB and ICBC – we’re going to make ABC a true modern commercial bank. Before shareholding reform, all the big four banks in China were part of China’s planned economic structure. At that time, the government took on every economic issue and did not consider banks as commercial institutions. So our first goal of shareholding reform is to build ABC into a true modern commercial bank.

The world financial crisis triggered by the subprime crisis has shown to us a very important lesson. In such an economic downturn and challenging environment, Chinese domestic banks have maintained 35% profitability. This is quite an achievement and can be attributed to the banking reform conducted in the previous years and the commercial management model we have adopted, which had significantly improved our risk resistance capability.

So, our future objective is to make ABC a real, modern commercial bank playing a pillar role in serving agro-related sectors and dedicated to providing first-class financial services to the vast clientele via diversified business lines covering both urban and rural markets, and a large distribution and cross-selling network across the world. This is the first objective and the most important one.

Our second objective relates to ABC’s special market position: ABC will be a commercial bank providing quality financial services to 900 million farmers in China. We shouldered a very unique social responsibility which is totally different from any other bank in the world. We must serve the largest disadvantaged group.

In China, we have 900 million farmers, which is unmatched by any other country except India. We need to provide financial services for the 900 million farmers. This is not only China’s business, but a cause drawing the world’s attention. For our goals in the agro-related business, I have focuses: first, to provide affordable services to farmers; second, to control our risks; and third, to achieve sustainable development. That is to say, on the one hand, we need to provide quality services to farmers. On the other hand, we will build ABC into a commercial bank with high profitability and sustainable development outlook.

Actually, this cause is quite great and also quite challenging. It is very difficult to achieve, not only for ABC, but for all banks worldwide. Nobel Prize winner, Dr. Muhammad Yunus, has provided a very good example to us. But his institution’s total assets, client numbers and target groups are much smaller than those of ABC. The scale of group we’re serving can’t be compared. This is actually a very special mission for the chairman of ABC, a mission different from other chairmen in the thousands of other banks in other countries. I would also like to direct your attention to this objective and would ask you to give us more publicity in social responsibilities we are taking.

TAB: You have stated your objectives very clearly. Let me ask you a very important question. In the process of restructuring the bank to become commercially successful, did you have to make a number of very hard decisions; for example, reducing the number of staff or moving them around in order to become more efficient? What are some of the hard decisions that you have to make?

Xiang: What you have said is one of the most difficult choices for us and is also our goal. Following my answers to your previous question, our third objective is to achieve profit growth and create values for investors while providing quality services to the largest disadvantaged group in the world. That is to say, we need to balance the coexistence of water and fire. This requires resolution, bravery, wisdom and stamina. I will lead my team to do our utmost to keep exploring and practicing, toward finding solutions to this challenging issue.

Out of the world’s top 1,000 banks, we are top in two areas. The first one is that we have 450,000 employees which is the largest one worldwide. Second, we have 24,400 outlets, branches and sub-branches which also make up the largest physical network.

We have made two principles in achieving our objectives for the shareholding reform. First, we will not cut our staff. Immediately after the breakout of financial crisis, some foreign banks announced they were laying off employees. However, we believe that we shall provide secured living conditions to our employees, and thereby encourage them to make more contribution to the bank. Second, we will not combine or withdraw our outlets in rural areas.

It is true that we would be able to reduce operational cost more rapidly if we take measures such as laying off workers or closing branches, and the Bank faces cost pressure when we made the commitment not to do either one of them. But we believe we can handle this problem through business development and reform. This is another challenge for us but also our responsibility.

TAB: That is a very important answer because you can choose not to make those decisions. You do not have to give the answer the investors are looking for because your objectives are different.

Also, there are certain factors about your cost base which are different from a commercial bank. Although you may have many more employees than a commercial bank, they may not cost as much. This is something I would like to know.

Xiang: Although we have the largest number of employees compared with other Chinese banks, actually ABC’s operating cost is at the same level with them and our per capita cost is even much lower. This is, to some extent, due to 50% of our employees being located at the county level or sub county level, and their living expenditure is not very high. So relatively speaking, our cost expenditure is much lower than others.

TAB: Still, I want to ask you, what is the most difficult decision you’ve had to make in the restructuring process?

Xiang: The most difficult decision for our reform is how to balance efficiency, profitability and the interest of our 200,000 grass-root employees. Theoretically speaking, lay-off is an effective way to improve operational efficiency and profitability. But we can not do that because it has direct bearing on our staff’s basic living, as well as our social responsibility and reputation. Now we are considering mitigating the cost pressure by business expansion. It is like labour process, painful but necessary.

TAB: Given that this is your most important decision-making area, should ABC be run more like a microfinance organisation or should it be run more like a commercial bank?

Xiang: Many other bankers also ask me this question. My answer is that we need to attach importance to both. I need to let water and fire exist together. There is only one solution: we need to have a big pot to separate the water and fire so there won’t be direct or strong conflict between them. Striking a balance between the commercial operation and serving the farmers is very difficult, but essential. We need to do this well.

I don’t think those two tasks are contradictory. I have several reasons. Firstly, China’s rapid economic development will lead to tremendous financial demand and leave huge development room for commercial banks. It is estimated that for this year, China’s growth rate will stand at 8% and it will also take the lead for the world. The central government has announced an economic stimulus package worth 4 trillion RMB. Judging from the economic indexes and banks’ lending in the first quarter, China’s economy is recovering. I think China is capable of ensuring 8% growth rate this year, though the World Bank has lowered its projection to 6.5%.

Secondly, although individual requirements for financial services in rural areas are limited, [delete] finance demand as a whole is quite large. As the third largest economy in the world, China’s rural area has huge microfinance business potential. Commercial banks could have a big role to play in this field. Thirdly, the issuance of microfinance is still guided by commercial principles and its unique propositions will be taken into consideration when we design new products, business processes and risk-control models. Fourthly, the Chinese government at all levels has directed [delete] their attention to the special features and attributes of commercial banks, and made a series of policies to encourage them to develop micro lending business, which to some extent fosters a friendly environment for us to operate the business by commercial principles.

TAB: How would you describe your relationship with the government? Your business, more than any other bank, requires a close relationship with local governments, especially in all the rural areas. When you become a commercially successful bank, do you think that the relationship with government can slow you down?

Xiang: No. We enjoy a very sound relationship with local government and this relationship is also improving. Serving rural area is not only our responsibility, but also concerns for central government and local governments. Since last October, I’ve visited 20 provinces and discussed with local governments about what ABC can do in serving rural people and supporting infrastructure construction in rural area. In all of the provinces I visited, the party committee leaders and the provincial governors told me that they want to cooperate with us in all fields and if we have any difficulties in securing money from the state treasury, they would also be able to provide subsidies from their local reserves.

To improve our agro-related services, we carried out pilot program in seven provinces in 2008 and now the number has been expanded to 20 provinces. It turns out that microfinance is actually very profitable and safe. Now, the loan repayment ratio has reached 99% and even 100% in some provinces. There is only a 1% default ratio.

This demonstrates that microfinance can be operated with commercial principles, and even more profitable than lending in cities. Our past year’s experience proves that we can let fire and water co-exist and even better.

TAB: For a commercial bank constrained by capital strength and management capability, it is very hard to balance microfinance and finance for large companies and projects. You describe them as fire and water. What percentage fire and what percentage water?

Xiang: It is true that as a bank, we cannot give absolute equal attention to both microfinance and corporate lending. A bigger share of one means a smaller share for the other. By fire, I mean big corporate business and water stands for microfinance. For us, the fire takes a large share and water a smaller share.

We have 900 million farmers and altogether 220 million households living in the rural areas. Through our analysis, we have found that 450 million farmers, or 50% of all Chinese farmers, have financial need for microfinance products. We innovated a product named ‘farmer benefit’ card which is a special product of ABC. I can say it is the only such product of its kind in the world.

Actually, it is very multifunctional. It has the function of settlement, clearing, wealth management and it can also provide revolving credit lines to rural clients and allow them to transfer money. The credit line is different from the eastern areas to the western areas based on their economic development conditions. In eastern areas, the credit line can reach 50,000 to 1,000,000 RMB. In the central and western areas, the credit line is 3,000 to 30,000 RMB. It depends on local situation.

In the next three to five years, we plan to issue 110 million cards and make credit line for 50 million households. A total of 250 million farmers will benefit from this kind of business. That is to say, among 450 million Chinese farmers who have financial requirements, 250 million of them are able to obtain loans through ABC. This is the largest initiative in the world to serve rural area financial needs and a living example to support rural development.

TAB: But what percentage of your total assets can be described as agro-related loans at the moment.

Xiang: About one third of our asset, or about one trillion RMB.

TAB: Do you have a goal to increase that to a certain number?

ABC: Of course it is going to be improved. We are targeting 50% in the next stage.

TAB: In order to build this business, do you think that the cost base will also increase?

Xiang: This certainly will be the case. Our government is also promoting this initiative . The Ministry of Finance has adopted favourable policies in six pilot provinces such Xinjiang province. If the bank issues agro-related loans 15% more than previous year, then it will give the bank 2% of the exceeding part as subsidies. As far as I know, starting from the next years, the Ministry of Finance will implement a new policy. All banks, both Chinese banks and foreign banks which are willing to conduct business at the county-level or sub county-level, will enjoy fiscal subsidies.

TAB: That benefit is not just available to ABC, it’s open to any player?

Xiang: Yes, all qualified banks can enjoy such favourable policies. However, we have more outlets and sub-branches located at the county-level and sub county-level, so relatively speaking we might enjoy more benefits than others.

TAB: The word ‘subsidy’ can be a bad word in the investor community. It can sometimes be misunderstood by investors.

Xiang: We can refer to the word ‘subsidy’ as a ‘tax cut’, or ‘risk compensation’. It depends on how you portray it.

TAB: But if the subsidy is available to everyone, then it is okay.

Xiang: It’s not just for ABC. All qualified banks are enjoying it. It’s the same for Chinese and foreign banks.

TAB: Besides microfinance, how much of your business can you describe as agriculture ‘supply-chain’ business or agricultural industry chain?

Xiang: ABC is very active in supporting agricultural supply-chain business. For instance, we provide support to grain-producing provinces; large mechanised farming bases; cotton producing counties and cities; big oil producing cities and counties; and also those producing seafood; the fruit tree industry; flower industry; pork processing industry; juice producing industry; and other leading enterprises including infrastructure development for tourism. And we also provide financial services for further processing companies which export their vegetables, pork and juice to Japan, Korea, Europe and America. In short, ABC is actively involved in all agro-related business including eating, drinking, entertainment and also leisure. For example, the famous alcohol brand Maotai is our important and loyal customer.

In addition, ABC also plays an important role in all links related to the agricultural industry chain including production, processing and marketing. We support the construction of agricultural product bases through such ways as issuing microfinance. All leading agricultural product-processing companies in China are our clients. And we also participate into such areas as trade, distribution and delivery of agricultural products. Based on our correspondent banking relationship across the world, the Bank also encourages domestic agricultural enterprises to explore overseas markets, and provides such services as outward documentary bills, international trade finance and international settlement.

TAB: In building your expertise in this value chain, do you think ABC can be better than your competitors in these areas?

Xiang: I think it is because we have more experience in this aspect. I’ve been to 60 countries in the world and I can see ABC is at the same level with our peers, and even does a better job in some areas.

TAB: I ask this question also because the Chinese government is encouraging foreign banks to get into that same area. What kind of strategic investor would be beneficial to the bank and if not a strategic investor, partners, for example, in the fund management business and other areas, which can add value to your business?

Xiang: Yes. But it doesn’t mean that ABC did less than we should. Chinese rural market has enormous potentialities. Foreign banks plays a complementary role in rural financial market with Chinese banks and further promote agricultural development.

We are now preparing for the next stage of our IPO plans. We have three important grounds to choose a strategic investor. First, they need to withstand this financial crisis well, have good management and corporate governance capability and good achievement during this period. Second, they need to be experienced in agriculture, rural area business and microfinance loan extension. Third, they also need to be profound in risk management and the training of staff.

TAB: In visiting 50-60 countries, what types of banks come close to these criteria?

Xiang: We haven’t reached a firm conclusion yet.

TAB: I want you to separate this question because partners can be different from investors, especially to grow some aspects of your business. What are some of the partners that you’re looking at today?

Xiang: I would prefer to combine the investor role and partner role. On one hand, we need investment. On the other hand, of course, we need advanced management capability, risk management capability and staff training capabilities to achieve win-win result.

TAB: What do you see to be ABC’s main competitor? I know you will say ABC has no real competitor, but if I say the word ‘competitor,’ what names come to your mind?

Xiang: In the rural market, ABC is the biggest, most powerful player. I’m very confident. I have the largest group of employees and staff; I have the best and the most extensive network, especially at the county and sub county-level. Our advantage is quite clear. I’m quite confident.

TAB: You are also seeking to boost your relevance in the urban areas. Can you tell us a little bit about your strategy for these areas?

Xiang: For the urban business, we’re now also undertaking strategic transformation and a ‘detail-oriented’ management approach.

For strategic transformation, I mean we’re changing the mentality established in the planned economy period. We have trained our staff with a ‘customer first’ concept and established professional teams so as to satisfy all kinds of clients’ demands. We will shift our urban business focus to the regions, clients and businesses which have long-term value in order to improve ABC’s value growth capability and satisfy investors’ requirement for investment return. For instance, we have built up groups and teams to provide services to large corporates like railways, petrol, big ports and other big businesses, which is greatly different from the previous period.

By detail-oriented management, I mean we’re training our staff to help them fulfil their functions. We are also looking to implement better conduct rules, to control costs more wisely and sensibly and also to adopt better risk management capabilities. As you know, for ABC, a majority of our staff come from grassroots areas. Detail-oriented management is an effective way to improve the Bank’s overall quality.

TAB: What kind of time-frame are you giving yourself to get your employees to a suitable level of skill before your IPO?

Xiang: We’re doing this on a yearly basis. A special development strategy has been made for the staff-training program with the goal of “tailoring staff, promoting suitable people, fully developing the potential of our staff and building up our staff with the most advanced professional knowledge.”

TAB: So, it’s not related to any timetable?

Xiang: Yes, we have a detailed yearly plan setting out the objectives and training contents. For instance, our branches and sub-branches are required to provide training for their staff and meet training targets each year, and all 450,000 of our employees are able to get such training opportunity. We make training plans and targets each year. Our training can be divided into three levels. First, domestic training including concentrated training at our headquarters, training at the tier-one branch level and those conducted by sub-branches.

Second, overseas training. We have established a training base in Hong Kong and hire experts from other banks to teach our staff. And thirdly, each year we select 40-60 division directors and send them to foreign countries. They will learn English for the first year and then spend one year as interns in foreign banks.

This year we also have recruited more than 200 new staff that have overseas banking industry experience or studied abroad. Under these initiatives, I’m very confident that in 3-5 year’s time, we’re going to improve our staff quality.

TAB: Are you a beneficiary of the Chinese fiscal incentive plans that the government announced recently?

Xiang: Certainly. We are one of the major beneficiaries.

TAB: Will some of your performance figures for this year involve some of the infrastructure projects that the government is investing in?

Xiang: A big proportion of government investment goes to infrastructure construction in sub-county areas, and investment in rural area is also increasing rapidly from 200 billion RMB in 2002 to 700 billion RMB this year. As you know, nearly half of ABC’s network is located in rural areas, which gives us more favourable conditions to involve in rural infrastructure construction. It is a very important advantage we have compared to other banks in our future IPO. Some investors might be worried that they can not get reasonable investment return because of our pillar role in agro-business. I would like to say it is a misunderstanding partly owning to that they do not fully understand Chinese realities. It is our agro-related services that give us the edge over our peers.

I can also give you a figure. During my visit to rural areas, I found that if the bank lends 1 billion RMB in rural areas, the profit you get is equal to 1.6 billion RMB from lending in urban areas. It demonstrates that agro-related business including lending to rural infrastructure construction could yield good commercial result.

TAB: Can you explain that a little bit?

Xiang: You can again refer to the case of Muhammad Yunus. He said in the rural areas in Bangladesh, the interest rate is 17% to 22% over the benchmark rate, but in the urban areas, only 7% to 8% higher. Government allows banks to cover risk with risk pricing rate. So interest rate in rural area is relatively higher than in cities and could effectively cover anticipated risk.

In China, the rate in rural areas is only half of Muhammad Yunus did, around 10% to 12% above the benchmark rate. But interest rates in urban areas are normally lower than the benchmark rate. That is to say, the same volume of lending in rural area could yield more interest income than in cities. Or, interest rate in rural area is enough to cover anticipated risk and our lending business in rural area is lucrative.

TAB: Do you consider ABC’s IPO to be late compared to the other IPOs? Why do you think ABC was not ready for an IPO in 2003?

Xiang: Compared with the other three big banks in China, we are late. I think there are three reasons. First, the shareholding reform for the Big Four state-owned banks is a tentative course. It requires pilot projects and abundant experiences. In order to minimize risks, the government decided to push forward reform gradually and we are the last one. Secondly, after going public, all the Big Four will be blue-chips. If we go public at the same time, could the Chinese stock market this? That is another factor we should consider.

The third reason is closely related to ABC’s special conditions. ABC is not only a state-owned bank but also a pillar for China’s rural finance. Our situation is more complicated and challenging than others. The Chinese government addressed the easier ones before handling the hardest one. The government first promoted Bank of Communication’s IPO because it is relatively smaller than others in terms of staff numbers and assets, then that of BOC, CCB and ICBC. That’s why ABC was not fully prepared back in 2003.

TAB: You are the first country in the world to try to list an agricultural bank. If you look at development in Japan, they did not make agricultural banks bigger; they actually broke them down into provincial banks.

Some people will argue that it’s not necessary to list ABC because it will make the bank more scrutinised by foreigners. So, what is the benefit of listing an agricultural bank?

Xiang: Of course, ABC will go public. One of the principles set by the State Council for us is to go public at appropriate time. But as for when to IPO, we should take a lot of factors into consideration.

It is clear that foreign investors will bring the Bank many benefits. First, they will bring us advanced concepts, risk management models and microfinance experiences.

Second, in China, people tend to think that the foreign stories are more valuable than Chinese stories. We also hope that advanced concepts and methods from abroad can help us to improve our management. For instance, now we’re introducing a pilot programme to develop an agriculture business line that covers our entire rural business. We plan to put 2,048 county and sub-county level sub-branches and outlets under the same business line. It requires us to use the experience of other countries for reference.

It’s not as people think that foreign investors just go to China to share the benefits of bank shareholding and then abruptly sell-off their investment stakes. Based on experiences of ICBC, BOC and CCB, ABC plans to establish a long-term friendly strategic relationship with foreign investors through such ways as bid inviting and appropriate control over lock-up period and ownership percentage.

TAB: What have you learned exactly from the IPOs of the other three Big Four banks? What do you like and what don’t you like?

Xiang: First, I like the lock-up period. For ABC’s IPO, we may even make this lock-up period longer.

Second, the appropriate ownership percentage by strategic investors is very important.
These two points are very important and valuable to ABC.

TAB: CBRC is asking for the Big Four banks to have a higher bad asset provisioning in this bad economic climate. Will this affect your profitability?

Xiang: Yes, it will affect our profitability to some extent. But I think it is a reasonable and necessary measure to keep healthy development of the banking industry. It is also in-line with Basel II and very important to respond to the uncertainties in this market. This is true not only for Chinese banks, but also for banks in other countries. We need to be more prudent and more cautious, and strengthen supervision over derivative products. In the short-term, a higher provisioning ratio will exert negative impact on investors and shareholders’ interest, but from my point of view it is indispensable and we should share this risk together to go through the difficulties.

TAB: The problem is the other countries are not playing by the same rules anymore.

Xiang: So leaders from all over the world should work out a new set of rules together and run business within the confine of these rules. Against such uncertainties in the market, I think it is always better to play safe, be cautious and remain prudent. In the past, banks always decreased provisioning so as to reduce cost. But now we should take lessons from that. As you know, a higher provisioning ratio means a stronger risk-resistance capability.

I used to be the Deputy Auditor General of the National Audit Office, so I’m always quite prudent on the risk control.

TAB: In banking, risk management is the starting point. Building the business is not a problem, but managing risk is the key.

Xiang: Many of the world renowned entrepreneurs are former auditors.

TAB: If you can manage your costs, then you can manage your business.

What you are building is, as you have said, very important not just for China but also for the rest of the world. I have seen microfinance models in different countries. What you’re building here is going to be the biggest. If it works in China, it’s going to work in other places.

Also, the relationship between government and private enterprise is very important to this model. What the government will allow you to do will be very interesting to watch.

Xiang: Thank you for your visit and interview, especially before our IPO. Your article will help more investors know about our bank. ABC needs all kinds of platforms to communicate our real thoughts and let foreign investors understand our business and value. Thank you very much.

TAB: The story of your development is very important to be understood correctly outside China.

Thank you. It is a great honour to meet you.