Four key issues on this matter appear to have been targeted:
There is a need to implement greater structural stability in a sector that has been lacking proper regulation. The supervisory function of the PBOC should be intensified. There are rumours that the PBOC will be reformed along the lines of the US Federal Reserve, power being exercised from the centre, supported by 10 regional offices.
The pace of commercialisation of state-owned banks should be accelerated. It is widely agreed that, in order to develop further, China's banks must become 'real' banks. There have even been calls for banks to tap the equity markets in order to raise much-needed capital.
A multi-tier system of financial institutions should be established. The financial sector should be ruled by law and financial controls consolidated.
Loans extended by banks must be controlled more strictly and potential creditors must be screened properly. Scarce funds must not be wasted on lost causes.
The central government has yet to flesh out these statements of principle, but Vice-Premier Zhu Rongji has promised that the state banks will be turned around within three years.
The mantra often repeated is the need to 'limit financial risk'. In Chinese terms, this means tying the financial sector still more closely to the government, a policy that has recently been called into question by the problems in both Japan and South Korea.
So, on November 15, the State Council promulgated the Provisional Regulations for the Supervisory Committee of the State Banking Industry, which are aimed specifically at monitoring the 'big four': the Bank of China, the Industrial and Commercial Bank of China, the Agricultural Bank of China and the China Construction Bank. The Supervisory Committee will supervise the quality of loans, asset management and personnel at the four banks. It will be headed by the PBOC and the Ministry of Finance.
The Measures for the Management of Foreign Exchange Under Current Account and the Administrative Regulations for Domestic Foreign Exchange Accounts have strengthened restrictions on trading the yuan. A ban has been placed on trading foreign exchange for any purpose other than to finance trade. The legislation is clearly designed to supplement the already narrow trading margins for the yuan and limit price fluctuations.
But what then of the needs of the state sector? Where will it obtain its funding, if the banks are controlled more tightly?
Interestingly, there have been rumours that the PBOC is preparing to ease credit on loans. The State Council has even hinted that it could relax the rules requiring banks to retain 13 per cent of their funds.
If that does not work, recent regulations permitting mutual funds and syndicated loans look like attempts to open alternative channels to obtain capital and take the pressure off the banking sector. The question is, will this be enough?
Freshfields is an international law firm. Most of its offices throughout Asia, Europe and North America include China specialists. For further details, contact Matthew Cosans through their Hong Kong (tel: +852 2846 3400) or Beijing (tel: +86 10 6410 6338) offices or by e-mail (firstname.lastname@example.org).