China's top-level conference for the development of the financial sector, to be held today and tomorrow in Beijing, will chart the guidelines for the next stage reforms.

 

Far-reaching decisions could be made at or shortly after the Central Financial Work Conference on some lingering issues that hold the key not only to the fate of the financial sector, but also to the nation's overall development prospects.

 

The previous two meetings were held in 1997 and 2002, each generating substantial reforming steps.

 

The remodeling of management mechanism for State interests in financial institutions is expected to be the issue that attracts most attention at the 2007 conference because of profound implications from a remodeling. But it is also the most difficult one on which a final decision is made at the conference.

 

Two major proposals were floated on this. The first one, which appeared to be the front-runner at the moment, is to invest the Central Huijin Investment Ltd Co, a financial holding company under the central bank, with a more independent role in administrating State assets in financial institutions.

 

Huijin, created in 2003, holds controlling stakes at two major State banks, a 50 per cent share at the Industrial and Commercial Bank of China, and shares in many other financial institutions.

 

The other proposal is to establish a new government agency based on the Ministry of Finance's Financial Department, which is currently also a major supervisor for State-owned financial institutions' financial affairs.

 

Huijin was also tipped as the institution to be responsible for the management of the nation's hefty foreign exchange reserves, which is expected to be another key topic at the conference.

 

Other major topics to be discussed at the conference include modification of the sector's regulatory framework, and the formula for the restructuring of the Agricultural Bank of China, the weakest one among major State banks and the last one to be revamped.

 

The government has kept a low key about the conference, partly because of sensitivity of the issues to be discussed.

 

Industrial insiders said about ten task forces, spearheaded by high-ranking financial officials, were formed to work on different issues and to provide policy recommendations to top decision makers.

 

Management of State interests in major financial institutions was among issues that have been hotly discussed.

 

The crux of the issue is how to strike the right balance between maintaining appropriate State control over these institutions and installing a market-oriented mechanism, which is crucial for the financial institutions' efficiency.

 

The State-owned Assets Supervision and Administration Commission is now the sole representative for State ownership in major non-financial State companies. Financial institutions were not put under the umbrella of the commission to avoid the financial institutions being forced by the commission to support non-financial firms.

 

But there has been no single body that is solely responsible for supervising the financial institutions. Both the Ministry of Finance and Huijin have some say. As for personnel, top executives are appointed by the central government.

 

It is obvious that this fragmented supervisory mechanism is a hindrance in making the banks truly commercially viable institutions.

 

Reform of financial sector is believed to an item high on China's unfinished agenda of economic reforms because an efficient allocation of financial resources is vital to an economy.

 

Four asset management companies were set up after the 1997 conference to take over massive non-performing loans from the four State banks, which at the time were believed to be technically insolvent. The 2002 gathering led to establishment of the China Banking Regulatory Commission and restructuring schemes that eventually led to three major State banks' listings at international and domestic stock markets.

 

(China Daily January 19, 2007)