A makeover of China's largest financial services cooperative next week will transform the Shanghai Rural Credit Cooperative Union into a full-fledged bank and pave the way for a potential capital injection.

The makeover is part of a countrywide overhaul of credit cooperatives that operate mainly in rural areas and are currently holding some US$200 billion in non-performing loans.

By transforming itself into a bank, Shanghai Rural would bring some 200 separate entities under one umbrella and be allowed to provide a full range of financial services to corporate clients and consumers. Shanghai Rural now has 326 branches in almost every district of Shanghai, except for Huangpu, Jing'an and Luwan.

"It is high time for this transformation," said She Minhua, an analyst at China Securities.

Shanghai Rural has recovered from deficit in the last few years and has reached a capital scale level that would allow the transformation to work, she said.

The transformation into the Shanghai Rural Commercial Bank, expected on August 25, would pave the way for a partnership deal with the Australia and New Zealand Banking Group Ltd (ANZ).

ANZ has had a cooperation deal in place with the union since 2003, mostly focused on consulting and advisory services connected with the bad loans and risk management. A partnership stake in Shanghai Rural would give ANZ wider access to the Chinese market and a pool of savings calculated in the trillions.

The Shanghai municipal government has stepped in to help Shanghai Rural with a total investment of 5.5 billion yuan (US$670 million), including land and capital. The shift will convert Shanghai Rural into a 100 billion yuan (US$1.2 billion) entity.

"We got 1 billion yuan in capital injections directly from the Shanghai Municipal Government," an anonymous senior official at Shanghai Rural told Reuters. "To introduce a strong foreign partner will be our next area of focus."

"The intention has been to invest after it becomes a bank," said Bob Zhu, ANZ's associate director for partnerships. "We would aim to be a minority shareholder."

ANZ is also in discussions with another bank in north China, said Zhu, but declined to give further details.

There are thousands of credit cooperatives across China.

According to the China Banking Regulatory Commission, credit unions across the country hold more than 3 trillion yuan (US$378 billion) in savings. Combined, they are the fourth largest financial entity in the country, behind the Industrial and Commercial Bank of China, the Agricultural Bank of China and the China Construction Bank.

Shanghai Rural provides financial services for farmers, and focuses on the economic development of rural areas in and around Shanghai.

The restructuring of credit unions across the country started in 1997. In the last two years, institutions in 29 provinces have undergone some kind of trial transformation.

Some 43 banks across the countries have been created from the rural credit unions. Nine are rural commercial banks, 34 are cooperative banks and 13 are still undergoing approval.

Most have chosen to form provincial level financial institutions, except for unions in powerhouse financial centers Shanghai, Beijing and Tianjin.

(China Daily August 17, 2005)