International rating agency Moody's Investors Service said in a report released on Tuesday that China's banking reforms have been positive and substantial but reform efforts are far from over.

The report examines China's Big Four state-owned banks and focuses specifically on the Bank of China (BOC) and China Construction Bank (CCB). The two banks were chosen as pilots for restructuring and public listing last December, receiving total capital injections of US$45 billion from the central government.

The report noted the Chinese government's strong support for the banks' reduction of non-performing loans (NPLs) and strengthening of 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 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 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. Moreover, management's adaptation to new decision-making methods will be a gradual process.

The report also stated 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 upgraded foreign currency deposit ratings for BOC and CCB to A2 from Baa1 in October 2003.

Standard & Poor's, another leading rating agency, signaled a positive outlook on the reforms of the two pilot banks in a report issued last month, saying 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)