China should embark on its planned bold attempt at banking reform to further facilitate the pilot scheme of private banks, urged leading economists.

The plan needs to be carried out promptly, as the country is faced with the urgent task of quenching the cash thirst of small and medium-sized private businesses looking to develop, said experts addressing the Symposium on China's Financial Reform and Securities Market Reform, held over the weekend.

"Establishing private banks is one of the core reforms in the highly risk-sensitive banking industry. Experimental work is thus essential," chief economist of the Asian Development Bank Resident Mission in China, Tang Min, told the symposium, which was jointly sponsored by Peking University and the University of Hong Kong.

"We stress the urge to execute the plan swiftly as we may need more than three to five years to see the results of the pilot scheme," said Tang.

Media reports earlier revealed that plans for a final private bank pilot scheme had been submitted to the regulatory authorities for approval, drafted by the Great Wall Finance Research Institute, which groups some of the top economists in China.

One of the main reasons for establishing private banks is to help finance the development of the non-State sector, which is not adequately served by the four largest State banks and existing shareholding commercial banks, say experts.

Some of the country's largest private enterprises have been urging a policy change, anticipating that their stakes in private banks will give them access to easy finance and new channels to gain a foothold in the financial industry.

The government, however, has been cautious over the establishment of private banks, recalling the difficulties that occurred in the early 1990s, when private funds flooded the then newly accessible urban credit co-operatives, forcing the government to later rein in the banking industry.

"Private capital is not naturally unreliable. The tangled private financing arose from misinterpretation of government policies," said Yi Gang, senior researcher with the central People's Bank of China, adding: "Some people forecast the new access to the banking industry would be only short term and their actions went against the government's intention."

Yi told the symposium that China's banking industry, now accessed by both State and foreign funds, should be equitable to private capital, and the government needs to further improve its regulatory forces.

"One primary principle is that private banks cannot make loans to their private shareholders," said Yi.

Experts say that the government needs to introduce change, but in the process exert and proceed with caution.

"Unrestrained reform may cause more havoc to the banking industry than no reform at all," said Tang.

(China Daily January 20, 2003)