There is no current threat to the normal functioning of China's financial system, said central bank Governor Dai Xianglong yesterday.

Dai acknowledged that financial risks exist in China's financial industry largely as a result of the large number of non-performing loans (NPLs) its banks amassed during the planned-economy era, said Dai, governor of the People's Bank of China (PBOC).

"China's financial industry, now and in the future, will continue its steady and safe operations," Dai said at a seminar organized by the Euromoney Conferences, a division of Euromoney Institutional Investor PLC.

"Any pessimistic view is untenable," Dai said at the seminar called The China Conference: the Year of Capital.

The two-day seminar, co-hosted by the Industrial and Commercial Bank of China and the Hong Kong and Shanghai Banking Corp Ltd (HSBC), opened yesterday and drew more than 700 participants from 24 countries.

Some Western analysts have long held views that China is facing an imminent financial crisis, citing the NPL ratio at its state-owned commercial banks as a primary concern, experts said.

Earlier this year Dai said the average NPL ratio at China's state-owned commercial banks was about 26 percent. That is far from enough to shake other robust parts of its financial system and the overall economy, he said.

The NPL ratio also dropped by 3.9 percentage points last year and a further 3.3 percentage points in the first nine months of this year, Dai added.

"The risks accumulated over the years have been contained, and is gradually being reduced," the governor said.

Rapid economic growth, which he said would hit 7.8 percent this year and will have no problem reaching an average of 7 percent in the coming 10 years, give strong support in preventing financial risks.

Dai also said the renminbi has strengthened by 44 percent against the US dollar and 5 percent in real terms since 1994.

Foreign reserves also rose to US$274 billion at the end of November, equivalent to 10 months of China's import value, he added.

Foreign debt also continues to decline, with around US$160 billion outstanding at the end of June, Dai said.

Savings deposits also hit a hefty 9.2 trillion yuan (US$1.1 trillion) at the end of October, securing commercial banks' liquidity needs, he said.

In the future, Dai said China will steadily promote the full convertibility of the renminbi to foster orderly movement of international capital. The currency is now convertible on the current account and 75 percent of the entries on the capital account.

China's strategy of opening up which balances integrating with the rest of the world and fending off risks is successful, he said.

Dai reiterated that the renminbi's current exchange rate is appropriate, but said the government will try to optimize the mechanism through which the rate is determined using stable measurements and keeping with "new circumstances in international capital flows."

(China Daily December 5, 2002)