Equal access crucial to financial reforms
(China Daily)
Updated: 2005-11-09 10:01

A rating of the financial environment in major mainland cities was released for the first time last Saturday, opening a new arena in which the great financial centres can compete against each other.

With Shanghai standing out as the clear winner, cities in eastern China as a whole are boasting a more positive environment for financial operations than those in other regions.

The results confirm a strong correlation between a sound financial situation and fast economic growth.

But the more thought-provoking finding is that central provinces have been outstripped by their economically less-developed western counterparts.

This outcome indicates that besides economic conditions, a number of other factors such as the local legal framework and market system have a significant impact on the quality of financial assets.

Prepared by the Institute of Bank and Finance with the Chinese Academy of Social Sciences (CASS), the survey ostensibly aimed to offer a comprehensive diagnosis of the local financial environment in different parts of the nation.

The country's policy-makers will be able to use the report to identify areas for improvement.

Because of the vital importance of a sound financial sector to the country's sustainable economic development, the government has invested heavily in recent years to transform major State-owned banks into competitive commercial banks. By 2007, the domestic banking sector will be opened fully to foreign competitors.

Yet, as the report shows, improving financial conditions is a systematic process that involves more than capital injection and corporate changes within financial institutions.

A clear-cut message for policy-makers is that they must also take into account synchronized reforms concerning legislation, law enforcement, State-owned enterprises, a social credit system, accounting and intermediary agencies.

As for investors, especially foreign backers, the CASS report serves as a useful investment guidebook.

Ever since China sped up banking reform three years ago, foreign investors have returned to express an interest in the domestic banking sector.

This year, foreign investors' active purchase of Chinese bank shares as strategic institutional investors shows their growing confidence in the success of China's banking reforms and the promising domestic financial market.

While recognizing the merits of the report that it highlights many key factors that define local financial situations, we have to point out the absence of concern for equal access to the financial sector.

Currently, the domestic banking sector is overwhelmingly State-owned while being opened wider and wider to foreign investors. Domestic investors still lack a fair chance to enter this sector.

As the private sector grows quickly in the rich coastal areas, local people and enterprises have accumulated tremendous funds over the past two decades. They are willing and able to invest in the banking sector.

Meanwhile, in the country's vast poor central and western areas, there is a lack of providers of micro-finance that can meet financing needs. As a result, poverty is difficult to eradicate as access to finance is limited.

Openness is definitely a key measurement of the soundness of a financial environment. Without granting domestic investors equal access, the country's financial reforms cannot be declared a complete success.

(China Daily 11/09/2005 page4)