By WANG ZHIPENG

Chinese commercial banks have basically achieved interconnecting banking between cities above the prefectural level.

THE four large state-owned commercial banks -- the Industrial and Commercial Bank of China, the Bank of China, the Construction Bank of China, and the Agricultural Bank of China, constitute the backbone of the Chinese banking system. Owing to low efficiency, lack of capital, and a high rate of bad debts over time, however, the system was weak and ineffective. In order to redress the situation, late last century the Chinese government launched reforms to streamline these four commercial banks and their operations. The banks subsequently set up asset management companies to buy back and resolve non-performing assets. Their operational structure was also upgraded and optimized so as to improve management efficiency and economic performance.

Statistics show that in 1999 a total of 1,400 billion yuan worth of non-performing assets were taken over from China's four commercial banks by independent institutions. Yet, in late 2001, bad debts were still being incurred at the rate of 25.4 percent. China's central bank, the People's Bank of China, consequently issued a directive, requiring a reduction of the average non-performing asset rate to 15 percent before 2005. The four banks have since gone all out to resolve this problem, and to formulate their plan to go public. This entails persuading the government to grant them tax exemption, to issue special state bonds, and for purposes of resolving the matter of non-performing assets, to withdraw policy-related limitations on the entry of foreign capital.

These reform measures are, to a great extent, a reaction to pressure brought about by China's WTO accession. China's first WTO year marked its banks' shift from a monopoly system to an environment of free competition. Certain Chinese banks have actively cooperated with foreign banks such as Citibank and HSBC, in equity participation, with encouraging results. The highest foreign shareholding in a Chinese bank is currently 15 percent.

Foreign banks have obvious advantages over their Chinese counterparts, as regards operational structure, access to capital, renewal of concepts, and experience in retail banking and combined business operations. According to the WTO agreement, foreign banks may conduct corporate RMB services two years after China's WTO entry, and expand their activities to retail banking after five years. Restrictions on foreign banks, regarding their areas of operation and client volume, will also be lifted within five years of China's WTO accession. Foreign banks will have the right to operate in different areas, and to open branches in the same way as domestic banks. It is obvious that in the future, foreign banks will command considerable clout within the Chinese financial mechanism.

Chinese banking system is accelerating its reforms.

Meanwhile, a third banking force is developing. Ten shareholding commercial banks, represented by the Bank of Communications, CITIC Industrial Bank, and the China Merchants Bank, and some 100 city commercial banks, have leapt into the competitive arena with state-owned and foreign banks. Last year these ten shareholding banks reached an agreement to establish a system of joint meetings, in order to strengthen their cooperation, strategic partnership and competitiveness. By the end of 2001, there were 108 city commercial banks in China with total assets of 873 billion yuan. Last August, on approval from the central bank, and in cooperation with their counterparts in major Chinese cities, the Shanghai City Commercial Bank initiated and launched the City Commercial Bank Assets Clearing Center. This is expected to go into operation by the end of the year. It will mainly handle inter-city settlements and, with the back up of city commercial banks around the country, is expected to become a competitive force.

The above three entities are, and will remain, the main body of the Chinese banking system that provides services to clients from various sectors. The key to resolving, and avoiding recurrence of non-performing assets in state-owned banks is to improve efficiency. Pressure brought on by the advent of foreign banks in China thus spurs improvements to its domestic banking operations. The government should encourage the channeling of private and foreign capital into strengthening that of small and medium-sized banks. They might then develop to the extent of being able to meet the financial needs of small and medium-sized enterprises and farmers. The ultimate goal is to build a multi-level, diversified banking system, whose service functions achieve efficiency through healthy competition, while maintaining the country's financial stability.

WANG ZHIPENG is studying for a doctorate at the Economic Management School of Tsinghua University.