The Governor of the People's Bank of China, Zhou Xiaochuan, has drafted a roadmap for China's financial reform as a guide to building robust and competitive financial institutions, innovative financial business, effective supervision and a favorable macro policy environment.

As for RMB exchange rate reform, Zhou reiterated that China would continue improving a 'managed floating' exchange rate system that keeps the value of the yuan basically stable at a reasonable and equilibrium level.

In a speech delivered at a forum in Beijing earlier this month, Zhou compared financial institutions to fish in an aquarium. Only those who are healthy enough are able to survive. He specified that the introduction of private and foreign strategic investors is an important strategy to help financial entities grow stronger. In his article published on Nov. 18 on China's financial system reform during the 11th Five-year Plan period starting from 2006, foreign and private investors will be allowed to become larger shareholders in Chinese state-owned commercial banks.

Under existing rules, no single foreign partner can own more than 20 percent of a Chinese financial institution and the total foreign investment cannot exceed 25 percent. The Bank of America holds 19.5 percent of CCB's equity, the HSBC has 19.9 percent of the Communication Bank of China and the Royal Bank of Scotland has 10 percent of the Bank of China.

The other tasks that Zhou defined in his article on reform of state-owned commercial banks involved improvements in corporate governance, an effective system of performance motivation, risk management and adequate capital reserves.

He hopes the reforms will turn state-owned commercial banks into vigorous market players that are able to take market risks. He encourages eligible state-owned commercial banks to participate in domestic or overseas capital markets.

Zhou suggested a mixed financial operation is necessary to sharpen the competitiveness of China's financial system. A mixed financial operation includes banking, securities and insurance services. Zhou proposes in his roadmap that trial projects be considered by financial holding companies.

He also highlights the importance of a diversified financial market system, which integrates the capital market, monetary market, insurance market, forex market and financial derivatives. He calls for innovation on the incorporation of securities companies and the stock market system in terms of their transaction process and mechanism.

Zhou stresses that any operations should be conducted under effective supervision. The core of the supervision, he said, would be to ensure adequate capital. He urged in his report the establishment of market-oriented incentives. This may mean, he explains, a lower deposit reserve requirement for financial institutions that carry out good risk management. Financial institutions that lose their competitiveness or are found to break regulations will be cleared from the roadside.

Zhou says interest rates will be more market-oriented. Both long-term interest rates on large deposits and small denomination forex deposit interest rates will be gradually liberalized.

The principle of China's reform on market-oriented interest rates, as stated in the central bank's monetary policy report in February, 2002, is that deregulation would be first realized on interest rates concerning foreign currencies, loans, long-term large denomination accounts followed by liberalization of interest rates concerning local currencies, deposits, and short-term small denomination accounts.

Zhou promised a gradual process of making capital accounts convertible. Domestic institutions will be encouraged to invest in overseas markets directly and indirectly. Meanwhile, qualified overseas investors will have easier access to China's capital market by relaxing restrictions on QFII (qualified foreign institutional investors) and allowing overseas insurers issuing panda bonds and China depository receipts in China.

By People's Daily Online