BEIJING, Feb. 15 -- The participation of foreign strategic investors in China's ongoing banking reform will not threaten the nation's financial security, a senior Chinese central banker said yesterday.

    Wu Xiaoling, deputy governor of the People's Bank of China, dismissed worries that the growing equity investment by foreign banks may erode the security of the local financial system.

    "Making the State-owned banks healthier on the precondition of State control by ushering in strategic investors will not affect financial security," she said at a seminar on Sino-US economic ties yesterday.

    "The important thing is we ensure the structural balance of the national economy at a macroeconomic level, so as to make our economic system more flexible and give the performance of the economy greater adaptability," she said in the speech, published on the bank's Web site. "If not, the performance of specific financial institutions will be affected."

    A number of foreign financial institutions such as HSBC and Bank of America have invested more than US$20 billion in local banks in the past few years, as local financial authorities seek foreign expertise and capital to help reform the sector before it is fully opened to foreign competition at the end of this year.

    In the latest development, Goldman Sachs, Allianz and credit card company American Express last month agreed to invest a combined US$3.78 billion in the Industrial and Commercial Bank of China, the nation's largest bank.

    As foreign equity investment increased, particularly when the biggest four State-owned lenders started to sell shares, worries grew that foreign banks might seize control of the local banking sector.

    The worries have been repeatedly refuted by Chinese officials, chiefly citing reasons like strict criteria in selecting strategic investors and a 25 per cent ceiling on foreign ownership of any Chinese bank.

    The fragility of China's banking sector, plagued by high bad loan rates and low capital bases, is a major concern when the authorities ponder changes such as exchange rate regime reform.

    Chinese officials have been resisting foreign pressure to let the yuan appreciate further after a major reform last July, insisting further exchange rate reform should be based on the nation's own circumstances and should not disturb stability.

    "The opening-up of China's financial market provides investment opportunities for global capital, enabling investors from different countries to share benefits from the rapid growth of the Chinese economy," Wu said.

    "The reform and development of China's financial industry also needs an international environment with relative forgiveness and mutual understanding," she added, citing factors such as the structural imbalance of the world economy and sharp fluctuations of oil prices that are currently posing a severe challenge to the Chinese financial industry.

    The opening-up of the industry in the past few years has enabled local financial institutions to improve management through competing with foreign counterparts, while foreign financial institutions have also witnessed strong growth in the process, Wu said.

    Chinese banks saw their profits grow to 253 billion yuan (US$31 billion) last year from 23.2 billion yuan (US$2.8 billion) in 2001.

    Their non-performing loan ratio dropped to 9.8 per cent last year from 2001's 25.4 per cent.

    The profits of foreign financial institutions, meanwhile, rose to US$446 million last year from US$196 million in 2001.

    Financial situation at the end of January (Source: the People's Bank of China)

    M2 (cash plus all deposits) 30.35 trillion yuan up 19.2%

    M1 (cash plus corporate term deposits) 10.74 trillion yuan up 10.6%

    Renminbi loans 19.95 trillion yuan up 13.8%

    Savings deposits 14.8 trillion yuan up 21.2%

    (Source: China Daily)