By Li Zengxin (chinadaily.com.cn)
Updated: 2007-07-06 17:23

China’s financial reform has been successful in the past four years, said Sir Howard Davies in a speech on his China tour this week. But there are remaining problems, such as a high dependency on bank deposits and a small scale of the financial market. The deeper the reform goes, the more difficult tasks it will face, Davies said.
Davies, director of the London School of Economics and Political Science (LSE), and former deputy governor of Bank of England, was on a tour of Beijing this week and made a speech on China’s financial reform at the LSE alumni event on July 2.

After the speech, the advisor to China’s banking and securities regulators talked more of his view on China’s economic development, in an exclusive interview with www.chinadaily.com.cn.

Davies believes the country’s efforts towards reforming the state commercial banks were successful. He said the public listings by three of the Big Four banks - the Industrial and Commercial Bank of China, Bank of China and China Construction Bank - helped them introduce strategic investors, load off burdens from non-performing loans (NPLs) and upgrade internal management.

“The strategy is correct,” Davies said. “In the past, no one hears about Chinese banks, (but) now they are on top of the world’s largest bank list in terms of assets and competing with first-class global banks.”

Davies also noted that the deeper reform goes, the harder missions it will need to accomplish, referring to the Agriculture Bank of China, the last of the Big Four yet to complete a reform, with the largest nation-wide network and the highest NPL ratio.

China’s securities brokers are much weaker than the banks and there is still a long way to go in the reform, said Davies. Reshuffling by mergers and acquisitions are under way, and the China Securities Regulatory Commission (CSRC) is stepping up efforts in supervision of the industry. “China needs to develop its derivatives market,” Davies said.

On China’s heated stock market, Davies said the regulators, especially the China Banking Regulatory Commission (CBRC) and CSRC, need to be particularly “vigilant” on bank loans entering the stock market. They must prevent such incidents, Davies said.

Asked about how the country may curb bubbles in the stock market, Davies said in fact there is no proven method to control such bubbles. All countries are trying their best on a trial-and-error basis to do so, he said. Improved regulation and supervision is needed.

“You can’t legislate or control optimism, after all,” Davies said. “The key is to find out where the holdings are. China has 90 million individual investors now, 30 million of which are new investors that just opened their accounts this year.

“For the country, the most important thing is to ensure these investors are not hurt. These new retail investors are rather ‘amateur’ compared with others. For the large investors including institutions, if they lose, it’s regretful. But that’s all, because they are at their own risks. But for the smaller ones, the most urgent task is to educate to make them beware of the risks.”

China saw the consumer price index grow 3.4 percent in May and it is expected to maintain a high level until October. Asked about his suggestions to the central bank in controlling inflation, the former deputy governor of Bank of England said the 3 percent or so inflation is rather low compared with the rapid economic growth China is going through, and with developed economies. The central bank needs to use interest and exchange rates leverage in combination to address the excessive liquidity problem, he said.

Sir Davies disagreed that speculative international “hot” money has pushed up China’s property prices, to bet on the renminbi’s appreciation. Davies said such a conclusion is groundless as there is no available statistic to prove how much international money has contributed to the price rises. In addition, the property prices in China, considering the rapid economic growth, are rather low, especially compared with international standards.

“(The) exchange rate of yuan against US dollar is rising fast, but with other currencies, it remains stable,” Davies said.

On China’s plan to invest part of its mounting foreign exchange reserves through the state investment company, Davies said the idea of “diversification” is in general “good” as it may reduce risks from holding a single currency as the country’s “treasure”. China could learn from Singapore’s experience, he said.

But it is wrong to pursue diversification at all cost, Davies believes. “The top priority is still on stability,” he said. He did not think the recent price plunges in Blackstone shares, the US private equity firm China’s state investment company has invested in, means a failed investment. From the long-run perspective, a strategic or large shareholder earns from the profitability of the company, rather than from speculation on ever-changing share prices, he said.

Finally, the director of LSE expressed his willingness to train more Chinese academics and officials at his school to better aid the development of China’s economy. With the summer schools launched in Beijing and a new Confucius institution in London, LSE will welcome and educate more Chinese and international students interested in Chinese studies, Davies said.