A leading banking regulator announced Tuesday that some domestic banks will soon be able to launch fund management companies on a trial basis.

Tang Shuangning, vice-chairman of the China Banking Regulatory Commission (CRBC), added that two more state-owned banks are likely to get capital injections from the Ministry of Finance to prepare for public listings.

Some pilot banks will be able to launch fund management companies "very soon," Tang told reporters yesterday on the sidelines of the Caijing Magazine Leadership Forum in Beijing.

"We hope that their participation (in the fund management business) will boost the development of the capital market, but we will also pay greater attention to risk controls," he said.

It was earlier reported that the Industrial and Commercial Bank of China (ICBC) and China Merchants Bank have been preparing for the launch of fund management companies and are promising candidates to get the first batch of licenses, which are expected to bring them new profit sources other than their traditional lending business.

Both banks could possibly to be chosen as pilots, said Tang.

But they will have to get approval from the China Securities Regulatory Commission (CSRC) after the CBRC gives the nod.

Widening Chinese banks' business scope is just part of the expected short-term policy stimulus to the banking sector.

Following a combined US$45 billion capital injection into the Bank of China (BOC) and China Construction Bank (CCB) at the end of 2003, the ICBC and the Agricultural Bank of China (ABC) are also expected to be recapitalized.

The Ministry of Finance will "play an active role" in the expected capital injection, said Tang, but did not elaborate on the timing or the sum of money involved.

Insiders predicted that the amount given to the ICBC and ABC will be greater than the bail-out of the first two state-owned banks.

All four are lining up for either domestic or overseas public listings, after becoming joint stock companies and really being commercialized.

The listing process will not be slowed, said Tang, adding that the State banks will go public when they are ready and when the time is ripe.

The recapitalization and other reform moves have already helped the BOC and CCB reduce their non-performing loan (NPL) ratios and increased their capital adequacy.

BOC had an NPL ratio of 5.12 percent at the end of 2004 and CCB had 3.7 per cent. Their capital adequacy stood at 8.62 percent and 9.39 percent, according to the latest statistics.

The two have also set up a framework for corporate governance as they transform into joint stock companies, but much work still needs to be done to ensure that the new system is functioning effectively, said Tang.

Zhu Min, executive assistant president of the BOC, said the bank has made substantial progress in talks to introduce strategic foreign investors, although the final decision has yet to be made.

"Instead of being counterparts, foreign banks and Chinese banks are now more like partners," he said. "We have to focus on partnership to become stronger."

After reducing their NPL ratios, a major challenge facing State banks in 2005 is how to maintain their asset quality and avoid the emergence of new bad loans, said Zhu. It is also crucial for them to control costs, enrich their profit sources and implement reforms in their local branches.

Roopa Purushothaman, global economist at Goldman Sachs, said financial reform is a major issue for China.

The nation's financial system has to be improved and its stability has to be maintained in order to ensure the stable long-term growth of the Chinese economy, she said.

Apart from the banking sector, the capital market is also under increasing pressure from market-oriented reforms.

The domestic capital market still has some systematic flaws that have to be mended to improve its efficiency and attractiveness, said Gao Xiqing, vice-chairman of the National Council for the Social Security Fund and a former vice-chairman of the CSRC.

To broaden its investment tools, the national social security fund is planning to invest in overseas stock markets, with Hong Kong being the first choice.

Gao said the fund's overseas investment preparations are well underway. But the exact timing of entry has yet to be determined.

(China Daily January 19, 2005)