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Watch for big changes in financial sector

By Sun Lijian (China Daily)
Updated: 2007-02-09 09:44

At the National Financial Work Conference held in Beijing January 19 and 20, new policies for the finance industry were outlined. The outcome can be expected to have a far-reaching influence on the sustainable development of China's economy.

After a boom of export-oriented trade for more than two decades, China has become a global trading power while its financial sector is still in the primary stage of development.

As a result, the excessive liquidity caused by the gigantic foreign exchange reserve cannot be cushioned by the financial system. The country is waking up with a big headache in maintaining economic growth.

Since China is still in economic transition, its fledgling financial sector is unlikely to copy the financial framework in developed economies. Hence, a financial reform tailored to the Chinese economy in transition saw its blueprint at the conference.

The sustainable development of the economy relies heavily on reforming its banking sector, which harbors the majority of the country's financial resources.

China's banks are weak in derivative financial tools and intermediary businesses. Therefore, most of them can only profit from making loans, which are subject to stringent limits in interest rates and exchange rates.

The banks, even the entire banking system, would face instability in case of fluctuation in interest rates and exchange rates if the banks do not improve corporate governance and sharpen their competitive edge.

The People's Bank of China, the central bank, has taken a series of moves to aid the financial restructuring of the State-owned banks in an effort to get them listed on overseas stock markets, showing the government's determination to reform the banks.

At the conference, the authorities announced that the Agricultural Bank of China, the only one of the Big Four State-owned banks not publicly listed, would be restructured to strengthen its role as a financial service provider for farmers and county-level businesses. This is certainly a firm step in furthering the reform of the State-owned commercial banks as well as the financial sector.

Yet, challenges abound on the banks' way to higher competency. The most important one is to change their governance after they become publicly traded companies.

The central government has also realized the importance of providing better financial service in rural areas. The rural economy is troubled because the financial service suppliers cannot support its development.

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