China Must Speed Financial Reform

China's impending entry into the World Trade Organization is accelerating its efforts to reform the country's financial system. Added impetus is also coming from Premier Zhu Rhonghji, whose five-year terms ends in 2003. Not only is China's integration into the world economy dependent on an efficient financial system, the Communist regime's legitimacy rests on its ability to deliver economic growth. And the country's shaky finances jeopardize the ability of the party to deliver that growth and the higher standard of living it implies for China's people.

China must solve four major problems. There's a mountain of bad debt: about 40% of the nation's gross domestic product. The solution is to move most of it to asset management companies, which have a decade to restructure the borrowers and sell off their assets. Commercial banks must refocus their operations away from growth toward profitability. To do that, China must implement bank restructuring efforts to meet international standards, and begin listing bank shares on the New York and Hong Kong exchanges. In equity markets, it must do more to curb insider trading and stock manipulation. In addition, too few companies float stock and those that do are often state-owned. Beijing has to make it easier for private companies to go public. It has to reform the politically driven listing of initial offerings favoring certain state-backed companies. And it must ease shareholding restrictions on large institutional investors such as insurance companies.

An efficient, functioning financial system would challenge the political status quo. Right now, the Communist Party appoints virtually all of the top financial people and channels resources wherever it chooses. This will have to end if China is to use its financial resources in the most economically efficient manner possible.

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