China's banking authority is pushing forwards with reform of the nation's city credit cooperatives. It's a response to investors becoming more attentive to every detail of the initial public offerings of China's state-owned banks, as well as to foreign banks searching for opportunities to buy stakes in the country's best-run national joint stock or city commercial banks.

The nation's city credit co-operatives have been given three years to eliminate internal risks and to turn themselves into joint stock financial institutions, the China Banking Regulatory Commission (CBRC) said in a statement yesterday on its website.

According to the statement, those that survive the restructuring reform will have to decide how to position themselves in China's increasingly open and competitive banking market.

"Positioning is key to any further development of the city credit cooperatives," said Zhao Xijun, deputy director of the financial research centre of the Renmin University of China.

"They'd better start with a community bank, serving individuals, family businesses and small enterprises in the vicinity," Zhao told China Daily in an interview yesterday.

His view is widely shared by many financial analysts, who argue it is not necessary for every bank to become big and national.

They say China needs a diversified banking system with banks targeting the demands of different clients, especially at a time when retail banking is becoming an increasingly lucrative business in China.

"With the boom in retail banking, there are enormous opportunities for such banks, as you can see from the active underground financing activities in China, especially in the more developed coastal regions," Zhao said.

According to a survey done last year by the Central University of Finance and Economics, there were about 740-830 billion yuan (US$89-100 billion) of underground financing in China.

"City and rural credit cooperatives can come in to meet such demand," Zhao said.

Many city credit cooperatives are already doing that.

For example, the Baiyin City Credit Cooperative in Northwest China's Gansu Province had lent an accumulative 590 million yuan (US$71.26 million) to local private enterprises by the end of last year. It has been simplifying lending procedures to help local small enterprises grow.

As well as individuals and small enterprises, the Jingdezhen City Credit Cooperative is also trying to serve some large enterprises by teaming up with other local players, according to a cooperative executive, who declined to give his name.

His cooperative is applying to become a city commercial bank and has submitted its application to local banking regulatory bureau.

City credit cooperatives that are operating well can be restructured into city commercial banks after approval, Tang Shuangning, CBRC's vice-chairman, said in a financial forum last year.

Local governments will try to help those with high risks in various ways, including bad-loan disposal and changes in management, he said.

Some of the city credit cooperatives that are in management chaos, with low asset quality and that do not qualify even after government help, will have to be washed out under the relevant rules, he added.

(China Daily July 14, 2005)