By honoring a key World Trade Organization (WTO) promise to open up its banking sector, the country has shifted its reforms of domestic banks into higher gear.

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), announced on Monday that eligible foreign banks will now be allowed to provide renminbi services to Chinese firms. The number of cities in which they are permitted to provide local currency services will increase from nine to 13.

The central government had negotiated a five-year grace period for its banking sector, one of the country's fragile but most critical sectors, with a two-step opening-up timetable upon its entry into the WTO two years ago.

However, the latest moves, arising from the first part of the WTO commitment, indicate the government is more than ready to fulfill its obligations.

Foreign banks will certainly be glad to see the removal of geographical and customer restrictions on their business as a robust Chinese economy creates more and more opportunities for them.

But the driving force behind the banking authorities' opening-up drive is a deeper recognition of the need to goad domestic banks, largely owned by the State, to reform more quickly and drastically.

Given the mountain of bad loans State commercial banks still face despite their strenuous efforts to reduce them over the past several years, much more innovative measures are urgently needed to fix the banking sector.

Though the country's four major commercial banks cut from their payroll about 250,000 employees between 1998 and 2002, the painful streamlining process is far from enough. Their staff still exceed 1.4 million.

And the biggest concern lies in a lack of efficient internal control and risk management in most domestic banks.

The CBRC chairman also on Monday invited qualified strategic investors from abroad to participate in the remaking of domestic banks.

It is an encouraging signal that the country is speeding up its banking reform.

Clearly, the authorities have realized that both the rivalry from foreign banks and the advanced corporate governance offered by foreign financial institutes are important in making domestic banks more competitive.

(China Daily December 3, 2003)