China Can't Let Crisis End Reform, Central Bank Says

By Li Yanping

Nov. 15 (Bloomberg) -- China can't let the global credit crisis derail financial reforms that have benefited the public and helped the nation's banks weather the turmoil, said Yi Gang, vice governor of the People's Bank of China.

``Although there have been doubts in the market on whether China's financial reforms should continue after this crisis led to massive government bailouts and nationalization of financial institutions, China's bank reforms can't backtrack,'' Yi said at a conference in Beijing today.

The worst financial crisis since the Great Depression has caused about $966 billion of writedowns and credit losses among financial institutions worldwide, according to data compiled by Bloomberg. The U.S. Treasury has initiated a $700 billion rescue plan to shore up distressed financial institutions.

``The U.S. and Europe may need to rethink financial innovations that exceed real economy needs and have pushed risks beyond control,'' said Zhao Xijun, a finance professor at Renmin University in Beijing. ``China's financial services are under- developed by comparison, so we need to push ahead with reforms.''

Banks in China sold shares, accepted foreign strategic investors and enhanced risk management over the past three years to avoid repeating the bad-loans crisis earlier this decade, when the government spent $650 billion rescuing them. Limited buying of subprime debt has helped the banks avoid bigger losses.

`Unimaginable Shock'

``State-bank reform has been a success, benefiting people and greatly enhancing financial services,'' Yi said. ``China's banks may have taken an unimaginable shock from this financial tsunami if they hadn't completed shareholding reforms.''

Reforms based on market principles must continue to help shield banks from future risks during economic cycles, Yi said today. Banks will also be ``tested'' when the nation's currency gradually become convertible and when interest rates are further liberalized, he added.

``The economic downturn has already started, and banks must be well prepared,'' Yi said.

China's economy expanded at the slowest pace in five years between July and September as the global crisis trimmed exports and industrial production and may send developed economies into recession. China announced a $586 billion economic stimulus package on Nov. 9 and also relaxed monetary policy to spur growth.

``China's banks are on the right tracks and they have learn a lot about risk management over the past few years, so such reforms should move forward,'' said Renmin University's Zhao.

The central bank has cut interest rates three times since September, lending weight to the coordinated emergency reductions by the Federal Reserve and five other monetary authorities on Oct. 8. President Hu Jintao is in Washington today with leaders from the Group of 20 nations to discuss how to counter the financial crisis.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net