Q: Some media outlets say that China has done well in most aspects of reform, with the exception of the reform of state-owned commercial banks, which have a high volume of non-performing loans (NPLs). They say that the financial sector may hinder China's economic development. What do you think of these comments? What has China done to reform its financial system since the country's reform and opening up? What are the goals of financial reform?

A: All those comments are based on a precondition—the high ratio of NPLs to the total assets of state-owned commercial banks. An overly high ratio of NPLs will not only make people lose confidence in the operation of state-owned commercial banks, but will also hinder the country's economic development.

China has all along taken measures to deal with non-performing assets (NPAs), especially after the Asian financial crisis began in 1997.

First, the Chinese Government abandoned administrative intervention in state-owned commercial banks and determined that these banks can independently provide loans.

Second, the performance of state-owned commercial banks has been improved, with their ratio of NPLs decreasing at a rate of 3 to 5 percentage points annually. This lays a foundation for the country to stably promote the reform of commercial banks.

To accurately grasp China's financial reform, we need a clear picture of the history and process of reform in the whole financial sector.

The place of financial reform in China's overall economic reform is a matter of strategic choice. In the early days of reform and opening up, fiscal and financial resources were used first in reforms of agriculture, state-owned enterprises and the foreign economy. When there was shortage of fiscal resources and when the system lacked flexibility, the financial sector bore the cost of reform. As a result, the banking sector accumulated a large quantity of NPLs, making financial reform lag behind other reforms.

Comparing state-owned commercial banks with state-owned enterprises, we easily find they are very similar: Both follow the system of government departments with distinct administrative levels and official rank standards. So, financial reform differs in its core tasks at different stages of economic reform and shows that it's exploring the path of a market-oriented reform.

In the 1980s, financial reform focused on separately establishing the central bank and commercial banks, and setting up some new specialized banks. All the banks have their own specific businesses. For example, the Bank of China (BOC) focused on international business, while the China Construction Bank (CCB) centered its business on infrastructure construction.

In 1993, the country required specialized banks to transform into commercial banks, and set up three policy banks: the China Development Bank, the Export-Import Bank of China and the Agricultural Development Bank of China. Consequently, commercial banks would never take on policy-related business.

During the subsequent financial reform, the country issued special treasury bonds of 270 billion yuan (US$32.65 billion) to make up for state-owned commercial banks' inadequacy of capital. Asset management companies were also founded, which peeled part of NPAs off state-owned commercial banks. The country even drew on foreign exchange and gold reserves, putting it into the BOC and CCB. We can see that reform of state-owned commercial banks is striding forward step by step, with past steps laying the foundation for future progress.

Capital infusion is only a step in the whole reform of commercial banks. In 2004, trial joint-stock reform in the BOC and CCB was the continuance of China's financial reform, the focus of which was strengthening corporate governance and improving the internal control mechanism.

So, the BOC and the CCB engaged world-renowned financial consultants and consultation companies to design an internal organizational structure and governance structure for them, and set up joint-stock companies and boards of directors in August and September 2004 respectively, according to legal procedures. The banks have since done much work with regard to internal control, incentive mechanisms, punishment of people responsible for NPAs, and human resources, including the selection of international employees.

The final goal of the state-owned commercial bank reform is to set up modern commercial banks, where maximizing profits is the key trait. Currently, some people consider public listing as the final goal. This is obviously a misunderstanding of the process of state-owned commercial bank reform. In fact, the point of getting publicly listed is to establish a standard structure for corporate governance and turn state-owned banks into real market entities through incentive mechanisms based on performance, sufficient risk control and capital restriction that meet the requirements of modern commercial banks.

Practice proves that China is pushing its financial reform rapidly and with much strength. Apart from the reform of state-owned commercial banks, reform of rural credit cooperatives has begun, and the reform of 12 joint-stock commercial banks and about 120 urban commercial banks has been accelerated. After reform, the Chinese banking sector will be much more competitive and can better confront the challenges posed by foreign financial institutions.