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The two faces of Chinese capital

The Chinese have a heavy historical load to shrug off. It's the financial system. The need for restructuring is recognized and a start has been made on dealing with banks' non-performing loans. Privatization will then be possible. But for all the bankers' adoption of western business suits, it's far from clear whether the government can bring itself to leave Chinese banks free to develop truly commercial lending policies. And then there's the stock market - the most hedged about with restrictions on foreign access in all Asia. Opening it up will mean grappling with weighty corporate accounting issues. More worrying still, it raises the scary prospect of unrestricted currency convertibility.

   

   

The Chinese have looked inwards at their financial sector and arrived at the profound realization that the system is unworkable.

They also know that they have to take decisive steps to avert a crisis. It means a fundamental and complete overhaul.

"Look at the statement made by the premier about market reform," begins one senior investment banker. "Wealth creation is the bedrock. That frames everything."

"The government wants a world-class economy and it realizes that the predicate for this is to structure a world-class financial system," says Michael Carr, Goldman Sachs' head of investment banking for Asia. However, it's not going to be easy. Sorting out banking and capital markets is going to be one of the People's Republic's greatest challenges.

Activity in the Chinese banking sector revolves around four state-owned banks: Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Bank of Agriculture.

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