China currently carries out separate operations in different parts of the financial sector. Financial institutions in one of the three sectors -- banking, insurance and securities -- can only operate within their designated sector and are not allowed to mingle operations with other sectors.

"The current system has its own historical background, because China's financial market is underdeveloped and financial institutions are not experienced,'' said Wang Xuebing, president of China Construction Bank.

Many financial institutions including some commercial banks suffered in the early 1990's when China experienced an overheated period of real estate and company investment.

Separate operations for different financial sectors have had to be adopted to prevent financial risks, Wang said.

But the policy was not aimed to force different financial institutions to operate separately. The country encourages financial institutions to make strategic alliances to expand intermediary business, he said.

China Construction Bank has made strategic alliances this year with several insurance companies including the Ping'an Insurance Company of China to share resources.

The Industrial and Commercial Bank of China and the China Merchants Bank also signed contracts this year with Ping'an and Pacific Insurance Company to form strategic alliances.

The agreements would not only help the banks generate new business, but also help the insurance companies reduce cost, Wang said.

However, mixed operation, called the universal banking system, represents a trend in the world's banking sector, he said.

"It is possible for some Chinese banks to conduct universal banking in the long run, due to the gradual opening of the Chinese financial market to foreign financial institutions,'' he said.

The integration of the world economy would bring China's financial market onto the global market. "Financial institutions will have to improve their management,'' Wang said.

Development of the information industry and rising demand from customers would also spur adoption of mixed operation, the president said.

Meanwhile, the improved quality of banking personnel and the improvement in financial supervision system would provide strong support for the universal banking system.

Ba Shusong, a researcher at the Bank of China, said China should adopt the universal banking system as soon as possible.

"Continuing to deny commercial banks' access to the securities market will only get them caught by the shrinking demand in the banking market,'' Ba said.

Moreover, mixed operations of deposits, loans and securities investment would enable commercial banks to be better informed about their customers' financial and credit conditions.

Although separate operation may improve efficiency, mixed operations meet the demand of an economy of scale.

"Under such a system, smart banks would be able to adapt to financial market fluctuations,'' he said.

Banks could cut down service costs by creating financial supermarkets, Ba said, adding they could also establish a stable relationship with the best customers through an agency service.

"If these banks could bring their advantages into full play, they could help upgrade integration of the financial system and cement its stability,'' he said.

The mixed operation system may also bring about some negative effects, say critics.

For instance, some banks may gain too much control in some industries by using the stock right of the securities they hold.

(China Daily 10/16/2000)