Transparency, Key Step in Financial Reforms: Analysis

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Last updated at: (Beijing Time) Saturday, June 29, 2002

Transparency, Key Step in Financial Reforms: Analysis

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The Industrial and Commercial Bankof China for the first time added two important figures to its latest annual report for 2001: the ratio of 29.78 percent of non-performing assets and the capital adequacy rate of 5.76 percent.

Its non-performing ratio remains fairly high, and the capital adequacy rate is yet to be raised to the required standard of 8 percent, however, this is the first time that a State-owned commercial bank has published in its annual report the asset and capital adequacy conditions that have always been top secret.

The People's Bank of China, the nation's central bank, introduced at the end of May procedures governing commercial banks' releasing information, requiring them to publish major information in their annual reports before the end of April every year, including fiscal and accounting reports, various risk management conditions, asset quality, corporate governance and major events within the year.

So far this year, most of China's State-owned commercial banks have released their asset quality statistics and publicized their reform plans on different occasions.

A central bank official says that improving the transparency ofthe financial industry is not only a commitment by China to the World Trade Organization, but also an inevitable requirement for further opening and reforms and reinforcing market discipline on banks. Banks also have to be transparent to compete in the international financial market.

Under the old planned economy, China's State-owned commercial banks performed to a considerable extent the function of policy banks; channeling capital to support State-owned enterprises left them with a huge amount of non-performing assets. Commercial banksseldom disclose their operating information and asset quality due to the lack of a market environment.

The poor transparency of banks covers risks and crises. When there are no competitors and capital flow is managed, these risks and crises remain concealed. However, the accelerated progress toward a market economy, especially China's entry into the WTO, has led to great changes in the operating environment of banks, and these concealed risks and crises are likely to surface if not exposed in time and solved.

Over the past 20-odd years, especially the last few years, the Chinese government largely reinforced banking reforms, gave commercial banks a clear definition of "money-managing financial enterprises" and targeted the reform of State-owned commercial banks into "genuine commercial banks".

During these years the government adopted a series of financialreform measures. Three policy banks were set up to replace commercial banks' policy functions; four financial asset management corporations were founded to buy non-performing assets from the four State-owned commercial banks; commercial banks were allowed to restructure into shareholding companies, and those qualified can be listed for public trading.

These measures have been a good preparation for commercial banks to increase their transparency. They have successfully cut non-performing loans, and increasingly standardized their management, meanwhile the whole financial industry is learning from advanced international financial management.

The central bank itself is leading the move in boosting transparency. From the beginning of last year, the central bank began to publish statistics and analyses of its financial operations in the previous quarter, and propose measures to solve some key issues.

Experts hold that good transparency is conducive to improving the central bank's administrative efficiency, and is helpful in accepting public appraisal and supervision.

Commercial banks have made a positive response to the demand for the release of information and show full confidence in this respect. Many commercial banks have invited noted international accounting firms to compile their annual reports and give advice, as well as auditing their asset quality, management, accounting and risk control and release of information to international standards.

ICBC president Jiang Jianqing says that, with the gradual opening of China's financial market, all domestic commercial bankshave to face the challenge of competing with international financial giants. A good corporate governance structure, a highly efficient operating mechanism and a standardized information release system will help commercial banks improve their competitiveness and mold a good market image.

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