Banking sources said relevant government departments and their think tanks are conducting intensive research into reform options. But they are yet to work out a practicable scheme.

The State banks act as the country's major distributors of financial recourses. Their efficiency has much bearing on the country's economic health.

The aim of the reform can be put very simply: to turn them into profit-making institutions.

But according to renowned economist Wu Jinglian, it is easier said than done. The State banks are not enterprises in a real sense and are close to government institutions.

Their operations are heavily influenced by the government, which decides the candidates for key posts in the banks.

"Sometimes the banks have to lend to promote social stability, sometimes they have to lend to support GDP (gross domestic product) growth,'' an official with the central People's Bank of China (PBOC) said.

For example, the government used to require the banks to grant loans to State enterprises which had difficulty in paying their employees.

The government would also ask the banks to provide credit to projects that it deemed crucial in economic growth even though the projects themselves were not lucrative.

The banks' lack of independence is one of the main reasons for their poor management and corruption.

"A reasonable relationship between the banks and the government has emerged as an issue that the reform should address,'' the central bank official said.

Some suggest that a special government agency needs to be established to act as the sole owner of the banks.

Advocates of the idea believe it could stop the intervention of government departments at different levels in the operations of the institutions.

The State Assets Supervision and Administration Commission was established earlier this year to act as the owner of non-financial State enterprises.

State banks were not put under the umbrella of the commission because it was thought that the interests of the enterprises and the banks could conflict.

The State banks are now still troubled by inadequate capital and hefty non-performing loans, which accounts for over 20 per cent of their total assets.

The adequacy of capital and treatment of the bad assets will determine the banks' health when they face real competition from foreign counterparts.

Under a central government target, State banks should reduce their non-performing loan ratios to 15 per cent and raise their capital adequacy ratios to the international standard of 8 per cent by the end of 2006.

But banks do not have the money to achieve the objective and the government footing the bill is an unrealistic idea, said Xia Bin, director of the State Council Development Research Centre's finance institute.

"All the tools that can be used should be used,'' he said.

Money can come from the banks themselves, government coffers, the stock and bond markets and even foreign strategic investors, he said.

The PBOC official said the central bank is considering all of the options.

To strengthen the banks' profit-making capability, they also need a liberalized interest, lower tax rate, experts say.

The banks' key deposit and lending rates remain decided by the central bank.

They have a very limited range to fluctuate their lending rates. But they need to be allowed to charge more when they feel a loan involves higher risks.

The experts say tax rates for the banking sector's business, including those for treating non-performing loans, are unreasonably high.

(People’s Daily August 4, 2003)