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Chinese PM Presses for Faster Reforms in Banking System - 2004-02-11

China's number two leader is calling for quicker reform in the ailing banking system, as the country prepares to allow foreign commercial banks to compete on its territory during the next two years.

Chinese Prime Minister Wen Jiabao met with finance officials Tuesday in Beijing. In remarks quoted Wednesday by a government newspaper, the Chinese leader repeated warnings that China must crack down on excessive lending and other weaknesses in the banking system.

China's state-owned banks have been lending money to government-sponsored projects at a frantic pace. Economists say investments in fixed assets such as construction projects and factories reached $664 billion last year - a 26 percent jump from the year before.

Banks have been investing in the projects even as they struggle with a large ratio of non-performing loans made in earlier years - often on government orders - to bankrupt state-owned enterprises.

Last month, the government sought to alleviate the problem by boosting the assets of the two largest institutions, the Bank of China and the China Construction Bank, with $45 billion from the country's vast foreign reserves.

But analysts say improvements in governance are perhaps more important than cash in improving the banks' performance.

Economics Professor Steven Cheung of the City University of Hong Kong says rectifying the problem is especially important during the next two years, when China will have to allow foreign commercial banks to compete on its territory.

"The biggest consequences we are going to see under this kind of competition are that we are going to see Chinese banks subjected to very low earnings and productivity," said Prof. Cheung. "Customers may switch from local banks to overseas banks."

As part of the reforms, Chinese banks are to be traded publicly and sell stock to foreign investors.

Prime Minister Wen said officials need to do more to stop illegal financial activities that could scare away foreign investment.

Chinese newspapers have recently been filled with news of auditors finding serious irregularities at major state-owned institutions. These include forged loan documents at the government-owned Industrial and Commercial Bank of China.