Capital infusion fuels bank reforms
 Updated: 2004-01-07 07:28

The State Council's decision to introduce joint stock mechanisms into the Bank of China and China Construction Bank marks a milestone in the nation's effort to build a stronger and healthier financial system.

This endeavour sounds the clarion call to modernize State banks, the dominant force of the country's banking sector.

By improving internal management and embracing standard corporate governance, the pilot reform is expected to lay a solid foundation to turn the two selected State-owned commercial banks into commercial banks in the real sense.

The planned capital injection of US$45 billion from the country's foreign exchange reserves is unprecedented. It clearly demonstrates the authorities"firm resolve to conduct bolder operations in the banking sector.

Since their inception in 1994, State-owned commercial banks have played an active role in the execution of the nation's development strategies. But the apparently powerful giants have increasingly shown their vulnerability to financial risks as reforms in other areas grow deeper and wider.

Inefficient allocation of financial resources has strained both the country's market-oriented reform and the sustained development of the economy.

With only three years to go before the country is obliged to remove all the geographic and customer limitations on foreign banks, the time left for domestic banks to transform themselves into competitive players is not so generous.

Admittedly, the government has significantly accelerated its efforts to pump out supportive measures for the banking sector in order to enhance the quality of bank properties and their profit-making capability.

But a huge mountain of non-performing loans (NPLs), inadequate capital and poor profitability remain drags on those revamps.

Moreover, as Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), admitted, there exists a certain gap between China's banking supervision and international standards.

The latest capital infusion shows the authorities are well aware of the urgency of the matter.

Patently obvious is the necessity to bring down big State banks"NPLs and jack up their capital-adequacy ratio if strategic investors from home and abroad are to be brought in.

As part of the joint stock reform, the new move will increase the two banks"capital in cash. But the authorities should make it clear the capital injection is not a windfall for the State banks but a stimulus for further and deeper restructuring.

Stricter external supervision and examination are also called for to ensure the safety of the newly-added capital and good economic returns.

Under the reform plan, the two banks will be required to launch financial regrouping, quicken their pace to tackle bad assets, and increase the ratio of capital sufficiency.

With more and more external conditions in place, the most important task the banking sector needs to address is still to strengthen their internal management and credit control.

The pilot joint stock reform and the possible stock market listing are not cure-alls in themselves, though they can equip the State banks with needed financial clout to carry on their reforms.

The banking sector must show more initiative in implementing painful but necessary internal reforms. After all, success of the reform and development of State banks is crucial to the overall performance of the Chinese economy.

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