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China vowed Saturday to get its major State-owned commercial banks ready for challenges from their overseas rivals before 2006, in what experts described as a move vital to the country's development in coming two decades.
Delivering the government's budget report to the country's top legislature, Chinese Finance Minister Jin Renqing said Saturday China would in 2004 continue the reform of the financial system to prevent and reduce financial risks, focusing on introducing a shareholding system in the State-owned banks.
The remarks follow Friday's declaration by Premier Wen Jiabao in his annual state-of-the-nation address that China needs to "accelerate the reform of the wholly state-owned commercial banks".
The reform aims to set up a sound corporate governance system for its banks. The Bank of China and the China Construction Bank (CCB), which are preparing for overseas listing, were ordered to have all necessary elements of a standard joint-stock bank, for example, the general meeting of shareholders, board of directors and board of supervisors.
China has promised to open its banking business -- in all places and all currencies -- to foreign banks in 2006. However, China's major banks are still beleaguered by lack of corporate governance, high non-performing loan ratios and low capital adequacy ratio.
Chen Yaoxian, member of the National Committee of the Chinese People's Consultative Conference (CPPCC) and former vice-chairman of China Securities Regulatory Commission, said the banking reform is a major step in right direction, since China's debt-ridden banking sector is not competitive with serious hidden risks.
International experience shows the biggest risk for a developing nation is financial crisis, which may trigger social and political crisis, said Chen.
Premier Wen has said financial security is an issue with a vital bearing on the overall situation since finance constitutes the core of modern economy and an important lever in regulating the macro-economy.
The Chinese government gave each of the two banks 22.5 billion US dollars late last year from its foreign exchange reserves to boost their balance sheets in preparation for stock market listing, ordering them to clean up their tattered loan books and improve lending practices to become internationally competitive banking firms.
Zhou Xiaochuan, another CPPCC member and governor of China's central bank, said the move indicates China has accelerated reform of State-owned commercial banks.
The country's four biggest State-owned commercial banks, Industrial and Commercial Bank of China (ICBC), Bank of China, CCB, and China Agricultural Bank, have a combined non-performing loans (NPL) of 1.9 trillion yuan (US$231.7 billion) by January of this year.
They account for about 75 percent of loans and capital offered or owned by the country's banking institutions.
Zhao Peng, a deputy to the country's National People's Congress and governor of Gansu Provincial Branch of ICBC, said the bank has launched package of reforms to improve its corporate governance, reduce non-performing financial assets in a bid to become a modern financial firm and strive for stock market listing.
The bank, the country's biggest bank which has as much as the combined asset of both Bank of China and CCB, said ICBC has a larger share of the non-performing loans owed by State-owned firms, and it is understandable for the choice of Bank of China and CCB that have less non-performing loans for the pilot reform.
CCB Governor Zhang Enzhao said his bank aims to become a stockholding banking firm that will create the biggest value for its shareholders among China's banks, and become a leader in the Asian market in this regard.
Wang Shuguang, professor with School of Economics of prestigious Beijing University, said that the full market access would enable overseas banking giants to vie with their Chinese rivals for high-end clients, the most valuable clients for banks, and for a large part of Chinese currency deposit market, high-caliber banking professionals, and for such lucrative services as intermediate service, international settlement and foreign exchange service.
Massive losses of domestic banking deposits to overseas banks may trigger monetary crisis if holders of the deposits lost trust of the domestic banks, he warned.
China's overhaul of its State-owned commercial banks have attracted attention of the international business community.
The plans and other government initiatives have been described by the Business Weekly of the United States as "smart moves" in its March 8th edition, saying that Chinese "authorities seem genuinely determined to create a real financial system, one that raises capital efficiently and directs it to the best companies."
Nicholas R. Lardy of the Washington-based Institute for International Economics noted that China's financial reform, particularly the reform of the banking sector, will determine its development in the coming two decades, according to the Beijing-based News Weekly Outlook.
(Xinhua News Agency March 6, 2004)
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