Setting financial tones(2)

Growing demands

China is currently at a stage of rapid industrialization and urbanization, which requires heavy investments from enterprises. That partly explains why many Chinese firms have been reeling from debt. Adding fuel to their woes is a weak ability to financing.

Last year, newspapers were flooded with reports about serious credit contagion of private firms in Wenzhou, Zhejiang Province, a boomtown of China's private economy. The incident raised worries over the survival of small businesses and economists have been calling for greater capital support for them.

The question has become: How can these financially strained enterprises be helped?

Since Chinese regulators have tightened rules for stock issuance, it is harder for firms to raise capital from the stock markets. Meanwhile, the companies have limited access to market financing tools, such as private equity funds, industry investment funds, insurance funds and trust funds.

Without doubt, banks remain the most reliable source of financing for enterprises. Between 1997 and 2007, Chinese banks extended more than 3 trillion yuan ($473.93 billion) to state-owned enterprises (SOEs), accounting for around 25 percent of the total increased capital of SOEs, according to data from the central bank.

As a result, the banks are expected to shoulder the responsibility of providing capital to the real economy.

"Requiring the financial industry, especially the banking sector, to service the real economy is a decision based on past experiences of Western countries and actual needs of our economy," said Zhao Qingming, a researcher with the China Construction Bank.

Major commercial banks are already taking steps to optimize services for the real economy. Shang Fulin, Chairman of the China Banking Regulatory Commission (CBRC) told Xinhua News Agency that the real economy and banking industry cannot prosper without support from each other.

"Looking ahead, the CBRC will require banks to optimize their credit structure, bolster service quality and ensure credit capital goes into the real economy," he added.

Yang Kaisheng, President of the Industrial and Commercial Bank of China, said the bank will strengthen efforts to better shore up the weak links of the national economy.

Unsolved problems

As the lingering effect of the financial crisis clouds the world economy, China's financial industry is also facing growing uncertainties. Expectations abounded that the country will deepen financial reforms in response to the simmering risks. Some economists even suggested the government establish a powerful commission that supervises and manages financial assets of the country.

But the latest National Financial Work Conference did not put emphasis on reforms as expected and the proposal of establishing a financial assets supervision and administration commission was not discussed, either.

Meanwhile, problems of the banking system are coming under the spotlight. In the past few years, China's banks helped lift the economy out of a downturn by staging a significant lending spree. They dodged external shocks thanks to the government's controls on capital accounts. But risks of local government debts are looming large, raising concerns over assets quality of the banking system. In terms of credit allocation, commercial banks prefer large SOEs to private ones. But that preference will obviously produce a negative impact on long-term growth of the economy.

"To address those issues, China needs to press ahead with financial reforms," said Zhao Xijun. "But the reforms may encounter oppositions from vested interest groups, including SOEs, which have easily obtained bank loans at lower interest rates. The reforms may even lead to a tussle between supervision departments," he said.

In addition, China's financial sector is far from perfect. Corporate governance and risk management of financial institutions need further improvement. Meanwhile, sluggish development of rural finance and small and medium-sized financial institutions remains an acute concern. The country also has a lot to do to better coordinate financial policies with industry policies.

China may have to wait until the next National Financial Work Conference to take heavier measures to tackle those problems.