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China Seeks Foreign Help to Reform Banking System - 2004-01-07

A Chinese banking official says the country wants foreign investors to help modernize its debt-ridden state-owned banks.

Liu Mingkang, head of the China Banking Regulatory Commission, told a state-run newspaper the government wants to "especially usher in foreign [banking] companies as strategic investors." He said this would be part of a new effort to modernize the country's ailing commercial banking system.

Tuesday, the government said it had used $45 billion of its vast foreign exchange reserves to boost the assets of the Bank of China and the China Construction Bank. The capital infusion was meant to bring the banks' finances into better shape before they are listed on overseas stock exchanges next year.

Analysts welcomed the government's efforts, calling them a big step toward repairing what many describe as the country's most pressing economic problem.

Ryan Tsang, director of financial services ratings at Standard & Poor's, says Chinese banks stand to gain from foreign competition and investment.

"Most of the Chinese banks are trying to import knowledge and skills from foreign banks and these actions will allow them to improve their governance," he said. "But this is a tough reform and it will take some time for them to make some substantial progress."

Standard & Poor's raised its ratings on the newly recapitalized Bank of China and China Construction Bank from stable to positive.

China's government-owned commercial banks are largely insolvent due to bad loans they have made over the years, often on government orders, to now-bankrupt state-owned enterprises. With bad debts accounting for about a fifth of their outstanding loans, the banks are said to be in no position to compete on international markets.

This worries Chinese leaders as the country prepares to open its markets to foreign banks in 2006, as mandated by the conditions of its membership in the World Trade Organization.

The infusion of capital was aimed at easing the banks' non-performing loans, but observers say improving corporate governance is more important in the long term.

Chris Murck, head of the China office of the international consulting firm APCO, said the infusion is also essential to maintaining public confidence.

"You might get to December 2006 and a whole bunch of major foreign institutions could open branches and the confidence of Chinese citizens in the soundness of their [own] banks began to waiver," said Mr. Murck. "You [would] have a massive transfer of funds from Chinese banks to foreign banks."

Chinese officials say they intend to make a similar infusion into another of major bank, the Industrial and Commercial Bank of China, but the amount and time and have not been set.