Online Extra: CCB's Boss: Profitability Counts, Not Growth

The head of one of China's largest banks talks about how much change is still needed

Wang Xuebing, president and CEO of China Construction Bank (CCB), took over one of China's four largest banks 12 months ago. With a reported return on equity of 9% and record profits last year, CCB is, by Chinese standards, relatively healthy. But Wang knows that there's a long way to go.

He's trying to focus the bank's more than 400,000 employees more on profitability as a way of minimizing layoffs. And he wants to bring control back to Beijing, taking away power from the 38 provincial-level fiefdoms that have been run almost as separate banks. Like other senior Chinese bankers, he'd like to see the bank have an IPO but says that's at least several years away. He recently spoke to BusinessWeek Asia Regional Editor Mark L. Clifford and Beijing Bureau Chief Dexter Roberts. Here are edited excerpts of his comments:

On layoffs, restructuring, and emphasizing profitability over growth:

The internal restructuring plan does not just aim at redundancies. Chinese financial institutions are different from Western ones in terms of operating environment, internal structure, and knowledge, and will have a different method of managing human resources.

The reality of China is that it has a 1.2 billion population. It is a huge resource, but also a huge burden. China's social system is fundamentally different from that of the U.S. In that regard, the Chinese financial system's social responsibility is also different from Western counterparts. We cut about 30,000 people. We still have 420,000 employees.... In my personal view, if a company has to rely on downsizing to generate profit, there is no hope anymore. Our countermeasure to the existing problems is to motivate staff and employees and to identify new growth areas.

Our plan is to shift and transform the pyramid [management] style into a flatter structure. I believe that transition will take at least three years. We also hope to further strengthen management and supervision capability of the headquarters. The 38 branches we had before had actually been 38 [separate] China Construction Banks. Although they all called me governor, they all governed on their own. We need to change that picture.

In the past, the performance of the Chinese banks in the eyes of the banks and regulators was based on scale -- the number of employees and expansion of the network. It never required the banks to look after their profitability. Return on equity and return on assets were never mentioned.... When I asked questions about performance, answers usually centered around loan growth. My question is: How much profit are you generating for me?

On listing the bank:

Purely relying on an IPO will not solve the problems of the Chinese banking industry. I think the key task here is, as competition is on the rise, to communicate the reality [of the bank's competitive position] to the staff and motivate them to work with us. As for CCB, I don't think our employees understand the real position of the profitability and competitiveness of their employer.

I believe that the corporate-governance issues could be somehow dealt with if the government didn't evaluate banks' performance on scale and speed of expansion but on the profitability and efficiency of operations.

As to when the conditions will be right [for an IPO], I don't have an exact answer. The internal restructuring just started.

On the impact of China's entry into the WTO:

The direct impact from WTO [entry] will raise the question about the capability of the government's traditional way of managing the macroeconomy. Macroeconomic management is implemented through administrative order.

The opening up of the financial industry post-WTO will also pose a serious challenge to the state's policy of allocating financial resources. In the past, by adjusting the lending policy it would influence the economy. As the foreign banks may not take into consideration those policies, this could pose a direct challenge to regulations and policies.

On the regulation front, the central bank is usually stricter with domestic financial institutions and looser with foreign financial institutions. And different standards of regulations are adopted. The adoption of different standards directly leads to unfair competition, which will create instability in the financial system. It will also pose a challenge to the taxation and legal and regulatory framework.

The tax system is not coherent. Foreign banks that operate in the SEZs [special economic zones] are only liable for 15% [profits tax]. We have to pay 33%, and on top of that, we have to pay 8% business tax. The local government tends to levy various fees on our branches. All this will have to be solved to prevent vicious competition. The market mechanism and system will also be challenged.

On the industry front, the direct impact will come from competition for talent. I don't have the basics of independent management, which is the decision over compensation. If we can't mobilize the workforce through an adequate human-resource-management system and if we can't retain the top performers, we will have lost the biggest asset we ever had. As I see it, there are no other issues that will have a more serious impact.

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