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Chinese banks away

from commercial

entities

SHANGHAI: China's state banks have been told to become commercially viable, but they are so tied up by official restrictions that there is no way they can meet the goal in the near future, foreign brokers and analysts say.

The Big Four banks, which account for the vast majority of banking business in the country, are weighed down by billions of yuan of bad debts that they are not allowed to write off.

What's more, the government will not allow the banks -- the Industrial and Commercial Bank, Agricultural Bank, Bank of China and People's Construction Bank -- to charge market rates for many loans to state enterprises.

This means they are often forced by the state to lend money at rates lower than they give on deposits.

Brokers and analysts said the transformation of the state banks will have to wait until China's state enterprises -- the main customers of the state banks and the albatross round their necks -- become commercially viable. More than a third of state enterprises are losing money.

In 1995, China implemented its first commercial bank law, modelled on that of the United States, ordering banks to operate on commercial principles and setting out ratios for capital adequacy, loans-to-deposits and other standards.

Widely praised by Western bankers, the law ordered banks to divest themselves of real estate, securities and trust and investment businesses.

But the law is more a statement of future objectives than a description of the state of the industry.

"It will take 5-10 years to make the four big banks into commercial entities," an analyst with a foreign brokerage said. "They cannot become commercial banks until state firms are reformed, which will take years."

The state banks all reported profits last year, but experts are sceptical about the way in which the numbers were derived.

"The reported profits of the major banks have more to do with People's Bank of China priorities than with what a Western accountant might find in the books," said John Crossman, general manager of Jardine Fleming Securities.

"The official figure for non-performing loans is 20 percent," the analyst said. "We estimate that the figure could be as high as 30 percent."

An official of one of the four big banks said the government had reduced its interference in state firms, but continued to exercise tight control over the four banks to preserve social stability and maintain confidence in the banking system.

"We are more free in making loans than we used to be but there is still much government interference. In the long term, our reform depends on the reform of state companies," he said.

An analysis in the Shanghai Securities News recently said that the proportion of non-performing loans held by state banks had been rising in recent years.

Another factor driving banks into the red is the interest rate subsidy on long-term personal bank deposits of three years and more, introduced in 1994 as protection against inflation. The banks pay about a third of the cost of this subsidy.

A key development was the opening in January of a national interbank market based in Shanghai where banks can trade capital, helping them to overcome short-term cash shortages or place surplus funds.-Reuter