China's financial market has seen great changes since the country joined the World Trade Organization in 2001. Corporate and overall systematic reforms last year best illustrate the country's ambition for change before it fully opens up its market by the end of this year.

In August, the central bank opened its second headquarters in Shanghai, relocating some of its functions to the nation's economic hub. It means the decision-making and implementation functions of the central bank will become relatively detached from each other. The monetary policy-making will fall on the Beijing side, while the Shanghai team will be in charge of open market operations.

This move will contribute to making Shanghai a national centre for capital, securities, inter-bank transactions, foreign exchange, futures, gold and property deals. It will contribute to the establishment of a multi-tier national financial market and ensure monetary policy-making can be more market-based as policy-makers will become better informed about the real market situation.

The banking sector made great headway last year in corporate reform.

Previously, the State monopoly sector, which owns the bulk of the country's financial resources, had been suffering from low efficiency and poor market orientation.

The State has made unprecedented efforts to reform the industry, spinning off large amounts of non-performing loans and establishing a new investment company to pour money, on behalf of the State, into major banks to kick off their share-holding reform. So far the Central Huijin Investment Company, established in late 2003 to accelerate the process, has injected US$60 billion into three of the so-called "big four" State commercial banks.

As part of the share-holding reform of State banks, foreign strategic investors have been introduced to improve corporate governance. The move has not only helped reform the operational mechanism, internal audit, credit culture and risk evaluation of those domestic banks, but also contributed to the fostering of a competitive banking market.

The introduction of foreign strategic investors has raised doubts about whether they will jeopardize the future development of domestic banks and whether the shares of those Chinese banks have been sold cheaply, which means a loss of State assets.

Actually, such doubts are unnecessary, as strategic investors can improve the corporate governance of domestic banks and create favourable conditions for their future listing on the stock market, which will increase the value of the banking assets.

It is hard to judge whether the price at which the State bank shares are sold is below its real value. Price is determined as a result of bilateral negotiations, and is accepted by both parties. Post-negotiation judgement does not count for anything.

As the listing of the China Construction Bank (CCB) has shown, the price of introducing strategic investors is not the core issue. What is more important is that such a move can provide an opportunity for domestic banks to go faster on their road towards building themselves into modern commercial banks.

Once the CCB was listed in the Hong Kong market, it was obliged to operate in line with the rules of the international financial market. All its activities will be under the scrutiny of international investors. This will help it transform faster into a modern market-based banking operator.

In the wake of the CCB listing, other domestic banks are gathering steam in preparation for listing in overseas markets. In this process, they will have to accelerate their corporate reforms to cater to the requirements of the international capital market.

It should be noted that reforms of the banks will expose many problems, which will need some time to resolve. The China Banking Regulatory Commission can play an important role in pushing the healthy development of the banks. It actually did a good job in pushing the share-holding transition of the banks and improving their corporate governance.

In the interest rate market, the country has gone further in its liberalization. From January 1, 2005, the country began to allow banks to conduct interest rate collar transactions, which, as part of the interest rate options, marks the formal start of the country's interest rate liberalization. As a result, domestic banks will have a taste of the necessity and challenge of determining their interest rates.

The reform in the foreign exchange rate of renminbi in July, which saw renminbi appreciated by a small margin against the US dollar, is also a highly significant move.

Although the small margin seems to have fallen short of the general market expectations, it is a sign of China's expanding economic strength and a signal that the country has a better capacity to cope with the complicated situation in the international financial market.

The interest rate and foreign exchange rate reforms have had a great impact on the domestic financial market. They mean that the market will play a stronger role in allocating financial resources and the government would have to pay more attention to the interest rate, or price of capital, in making its monetary policies. For the commercial banks, they would also have to face a floating interest rate and care more about market risks in making decisions.

The country also launched a number of new financial products to enrich the market last year.

In August, the central bank further expanded the scope of business for forward transaction of foreign exchange and began to allow swap transaction between renminbi and foreign currencies. The renminbi interest rate swap transaction and asset-backed securities product will soon be launched.

In May, the central bank released its regulation on the short-term financing bill, which allows qualified enterprises to issue short-term financing bills to institutional investors in the inter-bank bond market.

The move will  have a far-reaching bearing on the country's banking and capital markets. It allows those high-quality corporate customers of the banks to enter the bond market, where the cost of financing is lower than borrowing from banks. This lowers the financing costs of enterprises.

More importantly, it will change the current capital market structure that is led by banks and heavily leans towards indirect financing. In this way, the financial market risks will be reduced.

The many changes last year have laid a solid foundation for the healthy development of the financial sector in the coming years.

The author is a researcher with the Institute of Finance and Banking of the Chinese Academy of Social Sciences.