The man who gets things done
If China has a blueprint for banking reforms it is that there should be no blueprint. The experimental approach which has characterized economic reform for almost 20 years continues to be the preferred way forward for Beijing's planners.
"The Chinese have always religiously stayed away from overall plans and timetables," says Pieter Bottelier, chief of mission at the World Bank in Beijing. "They have a general direction in mind and then leave the details to the market situation and needs." As Deng Xiaoping, China's ailing patriarch, has put it: one should "cross the river by feeling the stones".
Such caution has the advantage of not causing sudden shocks to the financial system. Operating on a low capital base, China's state-owned banks, which still dominate the financial sector, are heavily dependent on the continuing confidence of the nation's household savers.
In ordinary circumstances, depositors might have looked elsewhere for returns. Interest rates generally have been negative in real terms and Chinese banks are not noted for their efficient service or impeccable balance-sheets. An evaluation of their "intrinsic safety and soundness" by rating agency Moody's resulted in a dismal E+ grade being allocated to three out of four of the main state-owned banks.
The slow pace of financial deregulation within China and tight controls on Chinese investment abroad have staved off any chance of depositors moving funds elsewhere. The only risk for China's banks, which are burdened by bad debts built up under the planned economy, is that time may be running out. "They can't indefinitely carry on the current system without running into a banking crisis," warns Bottelier.
Yet the government has had success in managing its reforms. Under the leadership of Zhu Rongji, vice-premier in charge of the economy, government departments have made significant changes to the system without generating the chaos seen in Russia and other former communist countries which have embarked on economic reform. "China has a good record with economic reform so far," points out one banker, "so I would hesitate to predict dire consequences."
This relatively smooth implementation of reforms since 1993, when China's Communist party decided to move fully toward a market economy, has surprised even the nation's leaders. "Originally we had anticipated more risk but as it has turned out, we have seen less risk and more success," said Zhu Rongji in an interview.
While most Chinese banks and government ministries lack officials with experience and a sophisticated understanding of finance, there seem to be enough of them to ensure that the reforms are enacted correctly. An openness to technical assistance from multilateral agencies such as the International Monetary Fund (IMF) and World Bank, together with advice from foreign banks, probably has helped to keep reforms moving in the right direction.
According to Maurice Lee, manager for Beijing at HongkongBank, foreign commercial banks are being showered with requests from Chinese banks to participate in training programmes. For locals, this is a time-consuming process. Meanwhile, foreign bankers face a frustrating wait, the scope of business permitted to them severely curtailed until the government decides that Chinese banks are ready to compete with the internationals. Foreign banks until recently have not been allowed to do business in the local currency and have been encouraged to deal mainly with foreign-invested enterprises rather than local companies.
Frustrated progress
Nevertheless, there are about 400 representative offices and branches of foreign financial institutions in China. The country's huge market is the lure. Vague promises that the banking sector eventually will be opened up to all-comers appear to have been sufficient to entice them in.
And progress is being made. In November it was announced that as of December 1 1996, the currency, the renminbi yuan, would be convertible on the current account. An experimental scheme launched in April seemingly worked so well that China's leaders saw fit to extend the experiment to the whole country in July, well ahead of an original deadline of 2000. A Chinese commitment to the imf's Article VIII, which stipulates current-account currency convertibility, indicated the formality of the December move, allaying suspicions that it was simply a trial run which could be reversed at any moment. Also in December, the central bank, the People's Bank of China (PBC), announced that a select number of foreign banks with branches in Shanghai's Pudong district, for the first time would be allowed to conduct local currency business. The patience of foreign banks operating in China since the early 1980s seems to have been rewarded.
On top of this, securities-market officials announced a huge batch of companies to be listed on China's domestic stock exchanges and on overseas markets. Even in the absence of a formal privatization programme in China, foreign investment banks will have their work cut out in coming months.
Yet liberalization may be slowed this year by the political agenda as the 15th Communist Party Congress (China's "elections") takes place and Hong Kong reverts from the sovereignty of the United Kingdom to that of China on July 1. Zhu Min, economic adviser to the president of the Bank of China, predicts that "because there are these big events, there will be a relatively conservative strategy overall". One Beijing-based analyst suggests that while reforms will continue, the upcoming congress will encourage government officials to shy away from risky decisions; the temptation will be to proceed with the least controversial.
While there is considerable support within China for economic reform, there remain conservative elements wary of letting go of the power they wielded under a planned economy. Even without ideological resistance, in such a labyrinthine government structure, bureaucratic in-fighting can play havoc with reform measures. Witness the fact that although China's stock exchanges have been functioning for five years, the country still lacks a formal securities law. The number of drafts of this law has now reached double digits. It has been hampered by disagreements over which government agency should yield what power over which securities markets and divisions between the China Securities Regulatory Commission (CSRC), which produced the first drafts, and the legislative committee of the National People's Congress, which has to pass the proposals into law.