Beijing, Sept. 27 (Xinhuanet) -- Chinese financial companies need to invest heavily in long-neglected areas such as corporate governance and risk management to secure success for planned stock offerings, advises accounting firm Ernst & Young (E&Y).

China's financial reform is standing at a critical juncture as it is only a little more than two years away from opening up fully the local market to foreign investors under World Trade Organization commitments, China Daily reported Monday.

Three leading domestic insurers were listed on the Hong Kong stock exchange last year, and the China Construction Bank and Bank of China, two of the four largest State-owned lenders, are planning initial public offerings (IPOs) as early as next year.

"Their success is of great significance to China's development," said Raymond Woo, chairman of China Operating Committee at E&Y.

But many preparations need to be made before the companies go ahead with their listing plans.

"Historical baggage must be unloaded first," Woo said.

Chinese insurance companies need to resolve the burden of policies written in high interest-rate years that resulted in huge losses after a string of interest rate cuts, The banks will also have to settle problems of huge non-performing loans and low capital adequacy, he said.

An important task, Woo said, is to bring corporate governance, risk management and information disclosure practices up to international levels to secure investor confidence.

"The cost can be high," he said. "But if you don't do it, how can you improve competitiveness?"

Insufficient investment

China's financial companies are relatively newcomers to the global capital market and have been frustrated by what analysts say are symptoms of maladjustment.

China Life Insurance Co Ltd, the second domestic financial firm to list overseas, was embroiled in an accounting scandal after its hugely-oversubscribed IPO at the end of last year.

And last month, only two months after its IPO in Hong Kong, Ping An Insurance (Group) Company of China, Ltd found itself in the headlines with its public relations agency prematurely releasing half-year results.

One reason for the difficulties, analysts say, is widespread reluctance of many Chinese companies to outlay money on corporate governance and risk management, instead eagerly pursuing profits.

It needs to be corrected. "Companies need to know their risk preferences before they set out their business strategies," Woo said.

"Profit is important but some risks can erode profitability," he said, adding risks in areas such as reputation, product innovation and compliance threaten to weigh on businesses' key earnings drivers.

"If risk management is only seen as a cost rather than a strategy, it's a problem," Woo said.

Chinese authorities have issued regulations, which analysts say are close to international standards, in areas such as corporate governance and risk management, but it will take time for them to be incorporated into the system.

China's still developing market economy mechanisms are hardly enough to guarantee the immediate effect of such measures, Woo said, citing the disproportionately large share of retail investors in the domestic stock market.
(China Daily)

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