The high-profile responses the Chinese banking authorities have made to domestic complaints about shares in State banks being sold cheaply have underscored the importance of the ongoing banking reform program.

To build a healthy and effective banking system on which the national economy will pivot, simplified judgments should not be allowed to distract domestic banks from their transformation into competitive commercial lenders.

Liu Mingkang, chairman of the Banking Regulatory Commission, clearly rejected criticism at a press conference on Monday by citing the expected contribution foreign strategic investors will make as well as the risks they are taking.

Since the debut of shares of the mainland's third largest bank China Construction Bank on the Hong Kong stock market in late October, domestic criticism has been widespread. Judging by the rising stock price, foreign investors have already profited a lot from their equity investment. Therefore, some sceptics insist prices should have been fixed higher if the worth of domestic banks' brands, networks and customer bases were calculated properly.

The way in which bank assets are priced is open to debate. But by merely focusing on paper value, the doubters risk missing the bigger picture of the country's banking reform drive.

The pressing need is substantially sharpening the competitive edge of the Chinese banking sector before more competition is introduced into the domestic market.

Since Monday, foreign banks have been permitted to conduct local currency business in seven more cities. According to China's commitments made upon entry into the World Trade Organization, by the end of next year all restrictions on foreign banks will have been scrapped.

The tight market-opening schedule does not allow for hesitation in terms of carrying out necessary reforms.

Initial public offering (IPO) is part of the share-holding reform of domestic banks aimed at diversifying shareholder structure.

Besides expanded capital, it is believed that such reforms will subject domestic banks to aggressive public scrutiny and even improve competitiveness through partnerships with foreign strategic investors.

Foreign banks have revised their attitude towards the Chinese banking sector from which they shied away just three years ago. Now they are jostling for the chance to embrace it. That shift in itself indicates the challenge of weighing up the potential of Chinese banks against their troubles including low profitability, poor asset quality and weak corporate governance.

Were it not for the government's unremitting efforts to restructure and rescue State banks in recent years, foreign strategic investors would not be so keen to participate in the reform program. If foreign banks had not thrown their weight behind domestic banks, it would have been hard to imagine successful public flotation.

Retrospective pricing of these banks' shares is impractical, if not unfair.

It has been prudent of the banking authorities to always keep an eye on the fundamental competitive dynamics of the domestic banking sector throughout the reform drive.

The contribution foreign strategic investors are expected to make is of vital importance. But the policy-makers should not take it for granted.

The value and necessity of current recapitalization and IPO for domestic banks rest not on their ownership structures being as diversified as those of foreign competitors, but on their performance as competitive commercial entities. That will determine long-term financial stability and efficient resource allocation in the economy.

(China Daily December 7, 2005)