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China Announces Long-Awaited Banking Reforms - 2003-12-01

China has announced a list of long-awaited banking reforms, while admitting that bad loans are getting in the way of modernization.

The head of China's Banking Regulatory Commission on Monday said reforms will include a plan to slash billions of dollars in bad debts from the books of China's banks, although he offered no details on how this will be done.

Chinese officials say more than one-fifth of all loans held by China's four major commercial banks are non-performing, which means they probably will not be paid back.

Analysts say the bad loans are a burden for China as it tries to meet its WTO obligations. One of those obligations is to allow foreign banks, which often have stronger balance sheets, access to the Chinese market.

Economics Professor Kui Li at the City University of Hong Kong said there is a five-year grace period before foreign banks can fully enter the market. "This grace period suggests that China has to hasten its banking reform, making it more competitive, so it can compete with foreign banks," he said.

Among other changes, the reforms announced in Beijing Monday will allow foreign banks to do business in Chinese currency in four cities: Chengdu, Chongqing, Fuzhou and Jinan.

In his remarks Monday, banking commission chief Liu Mingkang said China's big government-owned banks also need internal reforms, such as management shake-ups, before they can compete with foreign banks.

Many of the bad loans were made when banks allowed themselves to be pressured by government officials to lend money to unprofitable state-owned enterprises.

Some economists say that, while government reforms might help stop future bad debts from piling up, the reforms do little to fix the damage that has already been done. They say the government may still need a full-scale bailout of the country's banks.