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CHINA PREPARES ITS BANKS
by
Tony Walker
China has ushered in a new commercial bank law aimed at commercialising the country's debt-burdened banks by the year 2000. But representatives of international lending institutions and western commercial banks doubt the Chinese can adhere to such a timetable. "We're still years away from a modern banking system," said a World Bank representative, while crediting China with having at last made a start in reforming an area critical to its modernisation drive. China's banking sector remains rooted in the past and it will take more than a new law to transform an antiquated system into one more responsive to the needs of a modern economy.
While the new law, which came into effect on 1 July, lays down technical requirements such as capital-adequacy ratios in line with international banking practice, China will not have in place for some time the personnel to monior such requirements. The People's Bank, China's central bank, remain ill-equipped to discharge the extensive supervisory role specified in new laws and regulations. Monitoring China's banks would, under any circumstances, be extremely challenging. The Agricultural Banks, for example, has 50,000 branches.
China's Big Four specialised banks which dominate the market -- Industrial and Commercial Bank, Bank of China, Agricultural Bank and People's Construction Bank -- have always acted more like fiscal agents than commercial financial institutions. Their task has been to collect people's savings and redistribute them to state enterprises and for other purposes such as infrastructure spending specified in the state's credit plan. This system of resource allocation will have to reformed before the banks are able to commercialise. As the World Bank representative said: "The credit plan cannot be done away with overnight, and commercial banks cannot free themselves from their obligations as agents of the plan until that happens." China's banks are, because of these obligations, heavily burdened by state enterprise debt. Some 20 to 30 per cent of loan portfolios are believed to be "non-performing" in the western sense, although local central bankers say the figure is lower.
China has also announced it will permit clusters of urban credit co-operatives, of which there are about 5,000 across the country, to be transformed into commercial banks to serve growing numbers of small businesses. China has just 16 banking groups serving a population of 1.2 billion people.
From the Financial Times, 4 July 1995