Rating agency Investors Service said yesterday that China's banking reforms have been positive and substantial but reform efforts are far from over.

Moody's Investors Service released a report on China's banking reform, named "Reform of Chinese Banks Continues, with Evolving Business Models."

The report looks at China's big four State banks and focuses specifically on the two public-listing pilot banks, Bank of China (BOC) and China Construction Bank (CCB).

The two banks received total capital injections of US$45 billion from the central government last December and were chosen as pilots for restructuring and public listing among the big four.

The report noted the Chinese Government had shown strong support for the reduction on non-performing loans (NPLs) of the banks and strengthened supervision. Balance sheets have improved accordingly.

A strong emphasis on improving corporate governance at the State-owned banks is now apparent, said Wei S. Yen, author of the report and team managing director for Moody's Financial Institutions Group in the Asia Pacific region.

But it will still be some time before these banks develop defensible business models, he said.

"By defensible models, we mean those which can sustain earnings against an evolving backdrop of greater competition, further market opening and weaker anticipated government support," said Yen.

Since mid 2004, BOC and CCB have been successfully restructured into shareholding banks with additional shareholders and the installation of boards of directors, including non-executive directors outside of the government.

But whether the newly installed boards will function as planned will need to be further examined, said Yen.

There has been a shortage of qualified professionals and experts to act as truly independent directors. It will be a gradual process for the management to adapt to new decision-making methods.

Moody's report also noted that the interest rate rises may have an impact on the speed of banking reform.

Since late 2003, China's central bank has twice raised deposit reserve requirements to limit loan growth and for the first time in nine years, it raised interest rates in October.

Moody's had upgraded foreign currency deposit ratings for BOC and CCB to A2 from Baa1 in October 2003.

Standard & Poor's, another leading rating agency, also recently affirmed a positive outlook on the reforms of the two pilot banks.

In a report released last month, Standard & Poor's said that the asset quality of the two banks had improved significantly, with an obvious decline in their NPLs and increase in loan loss provision coverage.

(China Daily December 8, 2004)