The capital infusion into two major state-owned banks shows China’s determination to solve the stubborn problems of the financial sector, said Peking University Professor Li Qingyun, a National People’s Congress (NPC) deputy of the Jiangxi delegation. But he warned that there are no quick fixes.

Financial stability is a top concern of the Chinese government. In his annual report on the work of the government, Premier Wen Jiaobao stated that financial reform is a matter of urgent necessity.

The banking sector, the four state-owned banks in particular, are encumbered with high ratios of non-performing loans (NPLs) and low capital adequacy ratios. The problems came to the fore when China began opening the financial sector after its entry into the WTO in 2001.

“A management mechanism is vital for banks,” Li said. “They should have the right to run their business independently, while the government should strengthen macro controls instead of intervening in their operations.”

Now, the People’s Bank of China -- the nation’s central bank -- together with the China Banking Regulatory Commission, has strengthened credit checks for lenders to prevent the accumulation of new non-performing loans. It will also try to pilot a joint-stock system in state-owned banks to improve governance.

Each of the four major state-owned banks has an asset management company to help dispose of bad loans.

China announced at the beginning of this year that it had injected US$45 billion from its forex reserve into the China Construction Bank and Bank of China, both of which plan overseas initial public offerings (IPOs) next year. The Industrial and Commercial Bank of China and Agricultural Bank of China are also busy preparing for listing.

Li noted that the banks’ problems are closely associated with China’s state-owned enterprises (SOEs), many of which are deeply in debt.

“The SOEs need to improve their creditworthiness, and SOE reform can help the banks to resolve their NPL problems,” he said.

Another solution, Li pointed out, is to promote direct financing. Currently, Chinese enterprises usually borrow money from banks rather than raising funds directly in the capital market.

Because the domestic capital market is still relatively undeveloped, the government is also turning its attention to its growth.

“It is easy to create bubbles in the capital market. Therefore, the government should standardize it in order to lay a solid foundation for future development.”

Li also suggested that government should keep overseas IPOs in check, as the big SOEs are pillars of the domestic market.

(China.org.cn by staff reporter Tang Fuchun, March 11, 2004)