China's cabinet, the State Council, has given the go-ahead to the establishment of the country's fifth-largest bank, China Postal Savings Bank, as a result of the restructuring of the country's postal system.

"The postal savings bank will focus on retail banking and intermediary services," Cai Esheng, vice-chairman of the China Banking Regulatory Commission (CBRC), said at a financial forum in Beijing yesterday.

An earlier report from China Business News said that China Postal Savings Bank would start business at the end of this June if everything moved ahead smoothly.

The CBRC gave the green light to the launch of a postal savings bank last July and reported the plan to the State Council.

The regulator promised to take a series of steps to transform the postal savings sector into a genuine commercial bank, while striving to improve its risk-control and compliance capabilities.

However, disputes over the postal savings bank's form have continued since the idea was first suggested.

Some argue that the postal savings bank should be separated from the State Postal Bureau and put under the control of the CBRC.

Others say the separation will deprive the new bank of China Post's vast network and increase the bank's operating costs.

Insiders disclosed that after several rounds of negotiations it was decided the postal savings bank would be a wholly owned company of the China Post Group, therefore still within the postal system.

Compared with other commercial banks, the new institution will have a wide network of outlets and customers.

According to statistics from the CBRC, the postal savings service in China has more than 36,000 outlets nationwide, with two thirds of them in counties and rural areas.

It oversees 1.22 trillion yuan (US$150.4 billion) of savings deposits, occupying 9.25 percent of China's banking market.

However, due to a lack of experience in managing funds and hedging risks in capital markets, the postal savings service has faced a number of challenges.

"With the rapid development of the postal savings business, the current operating system that lumps together postal savings with other postal businesses has created many problems," according to a CBRC statement.

As they are part of the postal system, postal savings lack sound corporate governance and an internal control system.

Also, since the sector is not a real financial entity, it is difficult to open up investment channels.

Another important obstacle in the path of reform is that staff in postal savings can move to other departments without too much trouble.

Other workers can also move into the banking sector. Therefore some workers will lack necessary skills.

Some experts have suggested turning the postal savings sector into a commercial bank with a limited business scope in low-risk wholesale banking services and negotiable loans.

Originally, the State Post Bureau only offered savings accounts and never offered loans.

The bureau should make full use of its vast branch network to promote remittance and intermediary services, experts said.

For the moment, intermediary services account for less than 6 percent of postal savings services and products offered are limited.

(China Daily May 24, 2006)