Dr. Xie Ping, director general of the Research Bureau of the People's Bank of China (PBOC) made the remarks recently in a response to a heated debate among scholars and experts over whether or not the Commercial Bank Law has hindered the development and creativity of the banking sector.

PBOC, China Security Regulatory Commission(CSRC), and China Insurance Regulatory Commission (CIRC) held two joint conferences in June and September this year and reached a consensus in regard to the current operational and supervisory pattern, said Dr. Xie, adding that this rules out the possibility of revising the law in near future.

The theory of supervising and operating the specialized financial businesses took shape after 1993. The Commercial Bank Law which came into force in 1996 stipulates that commercial banks are only to focus on the deposit and loan business and that they should be separated from insurance and security operations. Now, especially after the Southeast Asian financial crisis of 1997, regulatory departments have become fully aware of the necessity for maintaining the above-mentioned principle of operation. When CIRS was established, the supervisory pattern of overseeing specified financial operations was formally instituted. In some ways this supervisory pattern slows down financial risks and thus helps secure the financial system.

However the rumors that the law might be changed are not groundless. Due to overwhelming attention on stability and security, the law lags behind the changing comprehensive economical situation and hinders the banking industry's expansion and creativity. According to Professor Wu Xiaoqiu of the People's University, the biggest risk now facing commercial banks are the restrictions imposed by the law instead of financial security.

Domestic commercial banks extract more than 80% in profits from the imbalance in deposit and loan interests. The continuing cuts in interest rates for savings deposits and loans have served as an accomplice to the severe competition among insider banks that further narrows their sustainable development potential. Therefore domestic commercial banks also want to explore the higher and quicker return operations of an investment bank. And, in fact, the CITIC (China International Trust and Investment Corporation) Industrial Bank and China Everbright Bank have all gone against restrictions on the sly.

Despite a great need for capital, Ma Weihua, president of the China Merchants Bank (CMB), cites CMB's unwillingness to make initial public offerings in haste, which reflects a strong confidence in the possibility of an imminent revision in the law.

The time for revision is not yet ripe, a financial expert says. Though the supervisory departments show connivance to the current across-trade operations in some banks, there is no evidence that they will allow other kinds of creativity. Moreover, a profit redistribution and reintegration between PBOC, CSRC and CIRC is expected to result from a mixed-up (banking, security and insurance) financial operation among commercial banks. The possibility of undermining their achievable profits will surely emerge as a gigantic resistance to the reform.

The Commercial Bank Law has surely imposed a lot of restrictions, said the expert, but it has also left some loopholes for banks to explore other possible financial operations. In a sense, the contemporary situation always goes beyond legislation in timing and finally engenders a new law to confirm and restrict itself.

(CIIC 12/15/2000)