Consequences of China bank ownership reform murky: Fitch

No established precedent for implementation of reforms.

The Chinese government's plans to restructure the ownership of state-owned banks—to allow for greater private investment—has the potential to kick-start wide-ranging internal reforms in key lenders.

According to a release from Fitch Ratings, however, it remains to be seen how the reforms will be implemented - and to what extent greater private ownership will translate into control, improved corporate governance, and the ability to direct lending away from policy-oriented functions.

The Bank of Communications (BoCom) is the first lender in China to have announced that it is studying plans to take advantage of the reform initiative and increase private ownership.

BoCom's ownership structure already includes large private investments including HSBC's 18.7% stake, which stands second only to the Ministry of Finance's 26.5% share.

Here's more from Fitch Ratings:

The objective of the reforms is to facilitate better corporate governance and greater operational flexibility through a more diversified shareholder base on the part of reformed financial institutions.

Under a best-case scenario, restructured companies such as BoCom will be able to retain the support of government, while also taking advantage of new management practices and better governance frameworks.

It is important to recognize, though, that there is no established precedent for how these ownership reforms will be implemented - and whether the planned restructuring will translate into meaningful reform of bank management, corporate governance and operational flexibility.

This is especially the case in light of the predominance of a state-appointed board and executive management positions at the state banks; the highly regulated nature of the banking industry; and the sector's strategic role in a centrally controlled economy.

An uneven application of the reform rules and a failure to develop a market-driven playing field for the restructurings, would mean that certain lenders (including BoCom) may be at a disadvantage in boosting their market share or accessing new capital - given the current dominance of the larger state-owned banks.