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    China Business
     Jan 23, 2007
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China seeks new ways to spend $1 trillion
By Zhou Jiangong

bonds, China Business News, a leading business newspaper based in Shanghai, reported.

The conference also indicated that China's economic development and reform will focus on the financial industry in the near future. The government has realized that sustained growth will largely depend on the modernization and opening up of the country's financial markets.

Wen said that China's financial sector is at a "turning point" and

that reform of the sector is entering a new era. With the end on December 11 of the five-year transitional period for its entry to the World Trade Organization (WTO), China has fully opened its banking sector to foreign investors and further relaxed its restrictions on overseas investment in the insurance and securities industries.

Although the factor is not mentioned in official statements, the major banks have been required to "deepen" reform to cope with new challenges created by the opening up of the sector, to strengthen the competitiveness of the country's financial institutions in the face of increasingly aggressive competition from their foreign rivals.

Zhou Xiaochuan, the governor of PBoC, said the successful listing of three of the big four state lenders, ICBC, BOC and CCB, is "preliminary" and the next stage of financial reforms will be "complicated, hard, and time-consuming".

The State Council has decided to restructure the Agricultural Bank of China (ABC), the last of the big four lenders, into a joint-stock enterprise and "seek opportunity for public listing". For this purpose, the government will have to inject huge amounts of capital into ABC to boost is capital adequacy and lower its non-performing-loan ratio.

The State Council also decided to restructure the China Development Bank (CDB), the country's policy bank. It is also widely expected that CDB will be injected with billions of dollars in order to enable it to finance China's "going out" strategy.

The messages from the conference sent a strong signal to the stock market in Shanghai and Shenzhen: the government is determined to broaden and deepen capital market reforms in coming years. The Shanghai A-share index shot up to 3,070 at 2:30pm on Monday, up 96 points or 3.21% from last Friday.

It appears that the conference has served as a venue for handling important policy changes.

The first such conference was held shortly after the Asian financial crisis in 1997. It was during that meeting that Chinese leaders made the decision not to devalue the yuan despite the sharp decline of nearly all other Asian currencies. It was also during that meeting that the decision was made for the Ministry of Finance to bail out the technically insolvent big four lenders by injecting billions of yuan and stripping off hundreds of billions of yuan in bad debts.

The second Central Conference on Financial Affairs was held in 2002, after China joined the WTO, with a focus on how to strengthen supervision on commercial banks and how to prevent a financial crisis from sweeping the country. The 2002 meeting decided to kick off a restructuring of ICBC, BOC and CCB, with an aim to turn them into joint-stock enterprises for public listing. For this purpose, the Chinese government once again had to inject funds, $60 billion in total, into the three lenders. The CCB is now listed in Hong Kong while the other two sell stocks in both the Hong Kong and Shanghai bourses. After the conference's decision, the China Banking Regulatory Commission (CBRC) was set up to enhance the supervision of commercial banks.

China's pledge to deepen financial reform at the third financial conference has been welcomed by overseas financial institutions registered in the country. "The conference, which was held at the end of the grace period for China's WTO accession, was of great significance for the nation to constitute an open, competitive financial regime," David Dollar, director of the World Bank office in Beijing, told Xinhua.

Tang Min, chief economist with the Asia Development Bank Mission in China, said: "The strategies and principles set out at the conference will further crystallize the future orientation of China's financial reform. The financial sector, as an economic engine, should also make a readjustment as China continues its shift from solely stressing economic growth to building a harmonious society."

Zhou Jiangong is a Shanghai-based analyst on China's political, economic affairs and international relations.

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