In an interview with Xinhua, the spokesman said China had injected part of its foreign currency reserve into the Bank of China and China Construction Bank, two of its "big four" state-owned commercial banks, to increase their capital in cash.

The move is aimed to introduce the joint-stock system into the country's banking industry and the two banks are selected as pilot for the reform.

This was a once-only allocation of assets and China did not sell forex bonds in the international market, the SAFE spokesman said, adding that China is a responsible country that always abides by the rules of the international financial market.

The fund-injection move had been completed by Dec. 31, 2003, and did not bring about any negative influence on either domestic or international financial markets, he noted.

The Bank of China and China Construction Bank have now very sound liquidity, both in terms of the RMB yuan and foreign currency, according to the spokesman.

Adding capital to state-owned banks ‘a major move’

The Chinese government has made "a major move" to allocate US$45 billion of its foreign exchange reserve for a bold banking reform, the spokesman said.

The reform is aimed at turning the Bank of China and China Construction Bank, two of the "big four" state-owned commercial banks, into banks in the real sense.

The reform and the use of national forex reserve for the endeavor constitute "a major move to help the country prevent and mitigate financial risks and upgrade its financial system," said the spokesman.

The money had been injected into the two banks by Dec. 31, 2003, to increase their capital in cash, which is part of the efforts to turn them into joint-stock banks.

The move was in line with the functions and basic targets of the use of foreign exchange reserve, he said, adding that there is no lack of precedents in the world that central bank reserves were mobilized to mitigate financial risks.

At present, China has a strong ability of foreign payments, but its financial system is not that strong and healthy, he noted.

The reform and development of state-owned banks, a major component of China's financial system, plays an important part in the overall performance of the national economy, decides on the safety of the national economy, and touches the interests of every people.

China's banking reform has achieved great achievements, but the irrational mechanism and high non-performing loan ratio of the state-owned banks are still major factors that affect the stability of the country's financial system.

The spokesman said that increasing the capital of the two banks is only one of the "external conditions" necessary for the reform of state-owned banks.

"If the inner reform (of the two banks) cannot be carried out, the capital injection move would be meaningless," he said.

Forex reserve should not be used for domestic projects

The SAFE spokesman rolled out the possibility to use part of the country's foreign exchange reserve for domestic construction projects.

Using foreign exchange reserve as investment demands much for safety and liquidity, but the requirements can hardly be met if it is poured into domestic construction projects, said the spokesman with the State Administration of Foreign Exchange (SAFE).

As a major part of a country's international reserve, forex reserve is only used to ensure the nation's international payments and maintain the overall stability of its financial system, he said.

It is a means to prevent and mitigate the nation's systematic financial risks rather than a solution to the fund-raising problem or an instrument to solve financial risks in some areas, he added.

"So I don't see much feasibility in the suggestion."

Some people have suggested the government injects part of its foreign exchange reserve to boost construction projects at home since the amount is huge.

However, the spokesman said, the SAFE would exert its utmost effort to facilitate enterprises or individuals who exchange the RMB yuan for foreign currencies for normal international exchanges such as foreign trade and investment.

(Xinhua News Agency January 6, 2004)