China is looking at some really interesting reforms these days, and Bloomberg is reporting on the specifics of the prospect for bank manager incentives being overhauled, to incorporate the stock prices of the shares of said banks to encourage shareholder friendliness. This has several positive implications:
- Share price increases from simply considering what is good for the bank long-term (the lockup on stocks and options is 3 years) rather than what is good for political/SOE borrowers.
- Opening up a lot more prospects ahead of the Hong Kong – Shanghai Stock Connect for appreciation potential in the big, heavily weighted financial services sectors (on both sides of the border).
- The possibility of more diverse analysts to have an impact on the Chinese bank shares price also promotes better governance, so this is a two-way street!
- More distribution of capital in China to where capital actually generates good returns. This is incredibly important from a structural perspective and gives a great indication of how far China would be willing to go to allow allocation of capital, and what the prospects then would be to actually put the massive savings of the Chinese to good use.
It is still a little bit too early to tell how exactly this will play out as the whole program would probably get underway sometime during the next 5-6 months and the Big 5 lenders in China would probably require a bit more time to adjust and get with the times. That probably allows smaller banks to get a leg up and create some competition by moving earlier, like Minsheng Securities in the article above.
I don’t really think that this will create a “Wall Street” culture in China, as long as the state remains a significant shareholder and controls the PBOC (meaning banks do what the government tells them to in the end, otherwise there are a lot of pain levers to pull) but the general idea of allowing for shareholder value to play a part will a) see increased earnings going forwards, and b) allow those earnings to result in a share price multiple that is higher than 5, which is the situation in China and Hong Kong at the moment for mainland banks. Share prices of banks could easily double in the next 1-2 years without this leading to particularly high valuations.