The Mainland must continue to restructure its SOEs, state banking system and agriculture industry to meet the challenges of WTO entry

China has now rolled up its sleeves and is getting down to the business of comprehensively restructuring its industries, Bank of China Chairman and President Liu Mingkang said at the Chamber's China Business Conference 2000.

Three major challenges face the country as it marches towards WTO entry: reforming its loss making state-owned enterprises (SOEs), improving its captive state banking system and increasing the competitiveness of its agriculture industry.

"Failure to address these three challenges will expose China to the external shocks and vulnerability that [will] come with greater openness to the outside world when China enters the WTO," Mr Liu said at the conference luncheon.

The Asian crisis sent a wake-up call to China's SOEs, because it highlighted the problems of close relationships between the chaebols and the banks, and the banks and the governments, he said.

For China, such relationships could mean that financial reforms become the hostage of the loss-making SOEs, since they remain the state banks' main customers. Combined, the challenges of reforming the SOEs and state banks have far-reaching implications for all levels of the government, Mr Liu said.

The slow economic growth after the crisis, increasing loss making ratios, deflation and other factors have not weakened authorities' determination to reform SOEs, he said.

"Indeed, they accept that they have no other choice but to accelerate corporate restructuring and acknowledge that capital markets and the private sector, including FDI, will play the most important role in reducing the historic burden," he said.

According to Mr Liu, some progress is being made. A number of China's industrial SOEs, which account for about 50 per cent of all SOEs, recorded their first increase in profits for years in 1999, while 1,700 loss making units went bust. Those SOEs raining red have been reduced from 6,599 to 4,098 as of October 2000, he said.

Big changes are also taking place in the banking sector. Lending is no longer being driven by policy degree, but by commercial consideration. The Central Government has forbidden all interference in banks from local authorities. Many fading financial institutions have been closed, and competition is driving greater efficiency and quality of banking services in China, he said.

"Accession to the WTO will complete a major part of China's foreign policy agenda and start a new era for China with a binding and international liberalisation schedule, pushing all the Chinese reforms and reformers forward," Mr Liu said. B