BANKING PROSPERITY: Business leaders from domestic and overseas banks brainstorm on the reform and global expansion of Chinese banks during the IIF Spring Membership Meeting recently held in Beijing (WEI YAO)

As a pillar of the country's financial system, Chinese banks are playing a bigger role in economic revitalization and rebalancing. But challenges still lie ahead on their path of financial reform and global expansion. Bankers from home and abroad discussed these issues at the Institute of International Finance (IIF) Spring Membership Meeting held on June 10-12 in Beijing.

The IIF is a leading global association of financial service firms with more than 360 members across the world. Edited excerpts of the bankers' comments follow.

On the role of banks in economic stimulation

William R. Rhodes (CEO of Citibank North America): After the financial chaos broke out, China was one of the first countries in the world to implement a massive stimulus package, a key part of which was strong credit support from the financial system. Chinese banks were in absolute sound shape, allowing their stimulus initiatives to be properly put into place. Compared with the financial institutions in the United States or Europe, they were underleveraged and able to move quickly to inject liquidity into the economy and at the same time keep risks at bay. The country's large pool of domestic savings and growing balance of payment surpluses have also provided insurance against banking risks.

Frank Newman (CEO of Shenzhen Development Bank Co. Ltd.): The Chinese banks have emerged unscathed from the ongoing global financial chaos. Instead, they are obviously becoming a major force of the country in stabilizing economic growth. One of their fundamental roles is the allocation of financial capital that can effectively spark growth momentum and does not bring about new problems.

Their financing for small and medium-sized enterprises, internal and international trade, household consumption and investment programs have also generated a strong driving force for the economy. In China, the rates that banks charge on loans and pay for deposits are regulated largely by the central bank, which could help ensure the country's financial health and firm up the economy.

Peng Chun (Executive Vice President of Bank of Communications Co.): China knows exactly the importance of a dynamic and reliable banking system. That is why the country has made vigorous efforts to improve and modernize the banks. Under appropriate supervision, the banking system can be a source of sustainable economic growth even amid looming downturns. To achieve that, Chinese banks should pay heed to a few important qualities, such as professional corporate management, competitive customer structures, social responsibility and competition stimulus on the basis of international diversification.

An outpouring of new loans this year has demonstrated the banks' ability to pick up some of the slack. More importantly, they are also contributing to the rebalancing of the economic structure by strengthening financing for consumption and rural markets. But I believe there will be a lag before the credit multiplier effect can work throughout the real economy. On a longer-term perspective, Chinese banks will see a modest increase in net profits with a low level of bad loans.

On financial reform and financial services

Wang Lili (Vice President of the Indus-trial and Commercial Bank of China Ltd.): A vibrant and sophisticated economy needs a more solid and mature financial system, raising the needs to further improve financial institutions, the banks in particular. China's banking system reform started several years ago with a massive shareholding revamp of state-owned banks. Today, the efforts are starting to pay off. The banks' significant advances in risk management corporate governance put them in a better position to keep the country out of the economic crisis.

Yet, we still have a long way to go toward shaping a modern and efficient financial architecture. More efforts are still needed to improve the fledgling capital markets, strengthen supervision over the banks, securities brokers and insurers, and strike a balance between direct and indirect financing. It's also necessary to tighten up risk management and foster financial talent with professional skills and market understanding.

Li Ruogu (President of the Export-Import Bank of China): Despite the financial crisis, China will not move away from reforming its relatively underdeveloped financial sector. Staying out of the game can help avoid risks, but eventually will leave us behind in competitions. The downturn also provides Chinese banks with an opportunity to step onto the global stage. Their integration with the rest of the world is bound to inject fresh steam into China's economic takeoff.

But learning a lesson from the Western financial woes, we have to pursue the reform more prudently in line with domestic realities and regulatory capacities. Recognizing the misalignment between financial innovation and the real economy as a major trigger of the crisis, China should take a cautious approach with financial derivatives, although they are necessary for market improvement and service diversification.

Fang Xinghai (Director-General of the Office of Financial Services, Shanghai): China has taken a step forward toward financial internationalization by pledging to turn Shanghai into an international financial center. As the biggest beneficiary of the decision, Shanghai will gain appeal to global financial giants and enjoy greater room to foster the development of its capital markets. For the country as a whole, the move is set to help bolster the efficiency of the financial sector and accelerate its integration with the rest of the world. More importantly, it will grant the renminbi a greater role in cross-border trade and finance.

On going global

Peter Sands (Group Chief Executive of Standard Chartered Plc): Given the growing role of China's economy, the global expansion of its banks brings benefit for the world, although it intensifies international competition. A compelling incentive behind the inevitable trend is to meet the growing needs of clients. As Chinese companies and individuals increasingly expand their businesses abroad, they need services from banks that have international networks.

In the past decade, Chinese banks have spread their winds across the world at an amazing pace through organic expansion, mergers and acquisitions, as well as strategic partnership with a local bank. Achieving synergies from acquisitions requires properly addressing cultural difficulties, and in a strategic partnership, you need to have real trust between partners and clarity on how the partnership brings value to both sides.

Because of the financial crisis, many policy makers across the world have become wary and suspicious of international banks that lend enthusiastically during boom times and withdraw suddenly when downturn descends. I think Chinese banks need to be very mindful of this changing regulatory retreat as they head overseas.

Ma Weihua (President of China Mer-chants Bank Co.): The worldwide economic downturn is not slowing down the global expansion of Chinese banks, and instead is presenting unprecedented opportunities. First, the timing is perfect now to snap up beaten-down foreign assets at market lows. Second, the financially distressed Western banks may well welcome an infusion of Chinese capital to shore up their balance sheets. Moreover, the accelerating internationalization of the renminbi will smooth the way for its overseas investment. The crisis also provides human resource insurance since it's much easier now to pool displaced foreign financial talent.

I believe the domestic market in the coming years will still be a top priority for most Chinese banks. But expanding abroad will gain importance in their overall strategies as it offers access to advanced banking management expertise.