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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.
(China Daily)
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