ADB Institute Offers Proposals to Reform PRC's Financial Sector

SHANGHAI, PEOPLE'S REPUBLIC OF CHINA, 9 May 2002: The People's Republic of China (PRC) needs to resolve its non-performing loans to strengthen its banking system says the Asian Development Bank Institute (ADBI), the Tokyo-based development "think-tank" and high-level training center of the Asian Development Bank (ADB).

This is one of seven proposals of the ADBI outlined in a seminar on "Sequencing PRC's Next Stage of Domestic and External Liberalization" before the Asian Development Bank's 35th Annual Meeting of the Board of Governors.

Implementing reforms in a particular order, or sequencing, is important to avert serious banking sector problems, said Masaru Yoshitomi, dean of the ADBI. In Indonesia, the lack of a coherent sequencing strategy for both domestic financial liberalization and capital account opening led to a capital account crisis and a systemic financial crisis. As a result, its poverty incidence rose to 17 percent from 10 percent before the crisis.

The other proposals are:

• further restructuring of inefficient state-owned enterprises, including closing down non-viable ones;
• establishing an independent Central Bank and supervisory agencies to oversee a rules-based system;
• implementing sensibly sequenced domestic financial liberalization and more relaxed entry procedures into the banking and non-bank financial sector;
• making foreign financial firms part of a vibrant financial system to upgrade industry standards and regulatory practices;
• sequencing the order of capital account opening and reducing currency and maturity mismatches;
• adopting a more flexible exchange rate regime that would allow the monetary authorities a degree of monetary independence targeted at domestic price stability and at the same time alleviate both short-term volatility and medium-run misalignment of external trade and domestic capital markets.

Other speakers were Enzhao Zhang, president of the China Construction Bank and chair of China International Capital Corporation; Liu Li-Gang, a research fellow of the ADBI; and David Roland-Holst, James Irvine professor of economics at Mills College, US.