The State Council, China's cabinet, opened its third Central Financial Work Conference on Friday which will lay out plans for the country's financial system over the coming few years.

Far-reaching decisions will be established at the Central Financial Work Conference on some lingering issues crucial 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 mechanisms concerning state interests in financial institutions should dominate 2007 conference due to the profound implications emerging from a remodeling. However, it may prove to be one of the toughest issues to settle at the conference.

Two major proposals were floated on this. The first one, the current favorite, is to give the Central Huijin Investment Ltd Co, a financial holding company under the central bank, 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 percent share at the Industrial and Commercial Bank of China, and shares in a myriad of financial institutions.

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

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

Other major topics to be discussed include modifying the sector's regulatory framework, and the restructuring of the Agricultural Bank of China, the weakest one among major state banks and the last one awaiting a revamp.

The government has kept a low key about the conference, partly due to the 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 the balancing act required 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 placed under the same aegis to avoid financial institutions being forced by the commission to support non-financial firms.

Therefore, 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 while in terms of 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 the financial sector is believed to be high atop 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 the establishment of the China Banking Regulatory Commission and restructuring schemes that eventually led to three major state banks' listings on international and domestic stock markets.

(Xinhua, China Daily January 19, 2007)