China's banking reforms will strike a balance between cutting the bad loan ratio and systematic improvements to ward off financial risks, according to a leading banking regulator.

Tang Shuangning, vice-chairman of the China Banking Regulatory Commission, was absolutely correct when he told a recent forum the banking reforms will provide for sound governance in major State banks and the introduction of foreign strategic investors.

Corporate governance structural reform is one of the most crucial tasks for State banks, apart from sorting out bad loans and inadequate reserve funds.

Inefficient management has contributed to many of the problems currently affecting the State banking industry.

The lack of the whole set of board of directors, board of supervisors and general shareholders' meeting in the banks has been the major source of bank managers' slack behaviour. Purely administrative measures is not an effective way of rooting out bad management in the banking industry.

The bad loan ratio of the major State banks has been on the decline thanks to tougher banking policies introduced in 2000.

The average bad loan ratio of the four big State-owned banks was 21.4 per cent in terms of the international five-category asset classification standards by the end of September. The average bad loan ratio of major financial institutions was 18.7 per cent.

While being pleased by the encouraging figures, we cannot but wonder whether such administrative regulation alone could maintain the industry's healthy growth. And effective self-regulation would be much better for the industry.

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