Senior banking regulators, bankers and legal experts yesterday hailed China's first banking supervision law as a crucial step in the nation's effort to improve bank supervision and ensure the industry's stable performance.

But they said officials must make unremitting efforts to enforce the Law of the People's Republic of China on Banking Supervision and Regulation, which takes effect on February 1.

The law was passed at the end of last year.

"The banking supervision law addresses banking supervision system reform and helps protect depositors' interests,'' Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), told a conference yesterday in Beijing.

"It has solved the problem of inadequate regulatory methods.''

The law clarifies the legal status of Liu's commission, which was established last April to take over bank supervision functions from the People's Bank of China, the nation's central bank. The legislation details the commission's responsibilities and regulatory power.

Wang Jiafu, a senior legal expert at the Chinese Academy of Social Sciences, said the law is a sign of major progress in the nation's drive to establish a rule-of-law system.

"We have to govern the banking sector in accordance with laws, rather than according to what a banker or government official says,'' he said.

Wang Weiguo, a law professor with the China University of Political Science and Law, said the efficient way in which the law was drafted and promulgated, in less than a year, indicates how determined the Chinese Government is to press ahead with financial reform.

Wang said legislators were able to quickly draft the law because they had tremendous co-operation from legal experts and other interested parties.

"We put forward our opinions, which grabbed their attention, and some were adopted,'' he added.

Promulgation of the law is only the first step in building a legal system for China's banking supervision, he said.

Conference participants also said it will take time for people to become familiar with and understand the law, and they vowed to do everything possible to ensure the smooth implementation of the law.

Xiao Gang, president of the Bank of China, one of the nation's four largest State-owned commercial banks, said his bank will abide by the new law.

He said the bank will also require its employees to study the law "clause by clause."

In a related development, Xiao said the bank will speed up efforts to establish an internal risk-control system. That is an important issue addressed by the legislation.

Xiao said his bank, when drafting this year's business plan, will focus on the capital adequacy ratio rather than deposits and loans targets.

The bank also plans to deprive prefecture-level branches of the right to approve loans, to ensure loan quality, and will revise bank regulations in accordance with the law, Xiao said.

Experts have said it is crucial that abuse of regulatory power be prevented.

Some have suggested the legislation gives CBRC officials too much power. CBRC will be able to ask customs authorities to ban responsible bank officials from travelling abroad, or to freeze bank assets when a bank is being taken over or restructured.

Wang Jiafu said CBRC needs to have adequate power, but suggested officials responsible for investigating cases should be separated from those responsible for assessing penalties.

"There has to be checks and balances to prevent inappropriate decisions, because ordinary people's savings are involved,'' Wang said.

"Any mishandling might have significant consequences."

Liu pledged to strictly implement the law to maintain order in the banking sector.

He also vowed to improve supervision transparency, introduce public scrutiny and establish an internal supervision system.

The commission is currently drafting three regulations regarding administrative penalties, administrative reviews and legal affairs.

"They (banking institutions) can request an administrative review or file an administrative lawsuit,'' he said.

"We are also subject to the surveillance of auditors, the judiciary and public scrutiny.''

Liu said the commission will encourage fair competition and financial innovation to improve Chinese banks's competitiveness.

The banks face a big challenge as they try to reduce their non-performing loans, which, as measured by China's classification, fell 157.4 billion yuan (US$18.9 billion), at the end of 2002, to 2.4 trillion yuan (US$289 billion), at the end of last year.

The bad-loan ratio dropped 4.69 percentage points, to 15.19 per cent.

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