According to the newly approved reshuffle proposed by the State Council, a ministry-level independent banking regulatory body will be separated from the People's Bank of China (PBOC), the country's central bank.

The establishment of the regulatory commission is in line with the country's financial situation, said an article in International Finance News.

The new commission will take from the central bank and Central Financial Work Committee of the Communist Party of China the role of supervising banks, asset management companies, trust and investment companies, and other depository financial institutions.

Its functions mainly include drawing up policies (not including monetary policy) and regulations on the banking sector, administering market entry and supervising financial institutions' operations, and investigating and punishing illegal practices according to related laws and rules.

In view of the country's present situation, splitting the banking watchdog from the central bank is of great benefit to the country's financial reform, noted the article.

The PBOC used to be responsible for both drafting and implementing monetary policy, and supervising commercial banks.

In theory, monetary policy should be short-term, which should be adjusted frequently to exert influence on the economy, but banking regulation policy should be stable and safeguard the health of the banks.

It is very difficult to effectively fulfill the two tasks at the same time.

With the formation of an independent bank watchdog, the central bank now can focus on fine-tuning its money policy while paying more attention to the needs of industry and non-financial economic sectors.

When adjusting interest rates and deciding money supply, the central bank should not lean too much towards the interests of commercial banks, the article said.

More importantly, the restructuring effort conforms to the development of China's financial system, the article pointed out.

Nowadays, the country's financial system is undergoing drastic changes featuring a rising demand of opening commercial banks to private investors.

However, China's banks -- mostly owned by the State -- have accumulated a big sum of bad assets.

At the same time, commercial banks failed to give enough support to the development of other economic sectors.

The growth of the amount of loans granted to small and medium-sized enterprises, and those small towns and cities has been slowing.

By the end of 2001, the aggregate deposits of all commercial banks reached 11 trillion yuan (US$1.3 trillion) while loans they extended stood at only 8 trillion yuan (US$960 billion).

A large part of the deposit-loan discrepancy was used to purchase treasury bonds or just laid idle in the central bank.

At present, industrial insiders unanimously agree that opening the banking sector to private investors to enhance the supervision and rewarding role of property right is the only way out and also the most pressing task.

On the one hand, solely State-owned banks should introduce private shares. On the other hand, as State banks withdraw their branches from counties and rural areas, the demand for financial services in those areas is quite likely to be met by commercial banks held by private investors.

But the characteristics of commercial banks entail strict regulatory measures, which must be adopted first to guide the sector's opening up, stressed the article.

As an industry with a high debt-to-asset ratio, the commercial banking sector requires a capital ratio far lower than general industry and commercial enterprises, and its shareholders bear only limited liability.

Needless to say, private capital will pursue self-interest. Only with strict laws, rules and aggressive regulatory efforts can private investment play a positive role in the banking sector, the article said.

Worldwide experience shows that the opening-up of the banking sector is a process full of risks.

The lack of stringent administration has resulted in serious financial chaos in countries where hasty privatization was undertaken.

In addition to the emergence of local non-State financial institutions, local financial markets and financial service products are also being challenged by the authorities' regulatory efforts.

So, it is a matter of urgency to foster a professional team that can efficiently carry out financial regulatory measures, urged the article.

The establishment of an independent banking regulatory commission can help build a professional regulatory team, expand scope of supervision to cover the whole banking sector and increase regulatory measures to better administrate the industry.

Therefore, the commission's debut, compatible with the country's needs, will promote commercial banks' reform and development, the article added.

In fact, since the promulgation of the Law on the People's Bank of China in 1995, China has gradually stepped up its financial regulatory efforts.

A number of financial laws were then adopted to complete the legal framework for supervising financial institutions.

The China Securities Regulatory Commission and China Insurance Regulatory Commission were set up in 1995 and 1998 respectively to direct the securities and insurance sectors.

(China Daily March 19, 2003)