Editor's notes: the ninety-year history of the Bank of China is linked to the whole modern history of China. War, revolution, construction, opening and reform, . . . every historical phase of the social revolution of China has left its own mark in the development history of the Bank of China. The reform and opening in the past twenty years have provided the whole banking sector in China including the Bank of China with an unprecedented opportunity and stage for achievements. China's economic achievements in the past twenty years astound the world and are obvious to all. Nevertheless, the growth and reform of the banking sector in the same period are full of twists and turns. How should we evaluate the banking history in the past 20 years? By taking the opportunity to celebrate the ninetieth anniversary of the founding of the Bank of China in this article, we recall the reform and development history of the banking sector of China in recent years. We'd like to stress that the miracle of China's rapid economic growth could not have happened after reform and opening without the banking sector's special role and contribution in the past 20 years. In return, if the banking sector is not able to further deepen the reform and restore healthy operation by taking advantage of the opportunities and challenges resulted from China's WTO entry, the miracle of China's rapid economic development would not last and might repeat the same mistakes made by Japan.

China officially joined the World Trade Organization (WTO) at the end of last year. This symbolizes that China's overall reform and development of the society and economy including the banking sector will also enter a new and historical phase. According to the framework of the WTO agreement, the opening requirement for the banking sector is much broader and the reform is more profound. These not only provide overseas banks with tremendous opportunities, but also give a big push to the progress of China's banking sector by urging it to operate in line with the international standards, and therefore ensure the long, stable and healthy development of China's banking sector and financial markets. Against this background, the Bank of China, a bank with the longest history in China, welcomes its own ninetieth anniversary. Under the co-existence of opportunities and challenges, it is beneficial to review the development experience of China's banking sector in the past twenty years so as to make clear the direction for future development.

In the history of the social development, the time of twenty years is a short and negligible span. However, during this period of opening and reform, China has made a miracle of the social and economic development, and the banking sector has played an important role in the development. If China is likened to a machine at full speed, then the bank is no doubt its engine. The late leader Deng Xiaoping, the paramount designer of China's opening and reform, once called the financial industry " the core of the modern economy". The development of China's economy in the past 20 years has been mainly boosted by investments. These investments primarily comprise the funds of the banking sector controlled by the government and the accumulation of fiscal reserves instead of capital and reserves from the private sector. The banking sector has been playing a special role in transforming the reserves into investments.

Since the opening, bank loans have been growing by an annual rate of 20%, much higher than the nominal GDP growth of 16% during the same period. Before the mid-90's, total loans had outgrown the total deposits in the banking sector in China. This reflects the fact that China not only depended upon the banking sector to channel all of her financial reserves into investments, but also relied on the creation of bank credits to expand the scale of social investments in realizing the expansionary effect of investment and boosting rapid economic growth. Since 1980's, several investment expansions in China have been related to the credit creation of the banking sector. Although they all resulted in overheating and inflation problems, it is undeniable that they expedited the overall speed of the economic growth.

At the same time, the banking sector also provided and paid profits and taxes to the government, enhancing the government's ability to support the rapid economic growth. According to statistics, from 1985 to 2001, the total amount of loans to all the industries in the economy provided by the solely state-owned commercial banks increased from RMB600bn to RMB7tr. During the same period, the total profits and taxes paid to the central government amounted to RMB500bn. It can be said that China's banking sector has been for the long time contributing to our country's economic construction by financing numerous key projects, infrastructure facilities and the state-owned enterprises, and playing an unique role in promoting economic growth and transforming financial capital into investment. The banking sector has also achieved a good return on the financial assets of the country by providing higher profits and taxes to the government. This unique nature of the banking sector in China is beyond comparison to that of any banking and financial institutions in other countries.

For the past 20 years, China's economic development and reform have always been complementary to each other, and the banking sector is no exception. While undertaking the responsibility to support economic development, the banking sector also keeps a close eye on its own reform. As an important component of the overall economic reform in China, the reform of the banking sector is also a gradual process. Under the traditional central planning economic system, the whole economy was managed and controlled by mandatory planning. For a long period of time, banks performed only as a cashier. The primary task of the reform of the banking sector is to clearly define the functions between treasury and banks, the central bank and commercial banks, as well as policy lending and commercial lending. By 1980's, the following progresses had been achieved: the specialized banks were separated from the People's Bank of China. The policy banks were established. The share holding commercial banks and non-bank financial institutions emerged. Financial markets were formed, though in primary stage. During 1980's, the banking sector's macro reform focused on constructing the framework of the banking sector under the market economy system. On the micro side, the banking sector during this period was characterized by autonomy, flexibility and competition.

In 1990's, new elements were added to the reform of the banking sector. The promulgation of the Central Bank Act and the Commercial Banking Act put the banking development and supervision on the right track under the rule of law. At the same time, the following tasks such as introducing international banking management principles and standards, improving operational quality, controlling financial risks, etc., became the agenda of the regulators and operators of the banking sector. Although the reform of the banking sector has been steadily deepening and helping the banking sector in self consummation, due to historical and practical reasons, these reform initiatives are far from sufficient in terms of meeting the needs of economic and social development as well as economic globalization. They have not yet tackled the issues of internal management mechanism such as corporate governance, operational management and corporate culture, etc. People still have misgivings on the success of China's financial reform.

The mismatch of reform and development exists because on one hand, banks have to undertake the heavy responsibility of supporting economic development, but on the other hand, they themselves lack incentive and constrain mechanism, and their rights, benefits and responsibilities do not balance well. Besides, due to its special nature, the banking sector opening lags behind that of other industries. The sector has been long protected with low market orientation. All of these have cost the banking sector dearly ---- loss of its healthy operation. Especially in the recent years, the problems linked with operation management, internal control, bank regulation and integrity of bank officers have been often exposed in the banking sector. Examples include huge non-performing loans, lack of sound management, corruption and unlawful operation, etc.

For a commercial bank in the market economy, the criteria of healthy operation include sound corporate governance on one hand, adequate capital and ability to control and deal with bad debts timely on the other. It is well known that the state-owned banks in China have long been besieged by huge non-performing loans. Apart from their management quality, one important reason lies in their inadequate capital. Due to their heavy social and economic burden, banks are required to pay all their profits and operational income to the government. There is little left for banks to increase their capital base or set aside for necessary provisions. Considering the reform of the banking sector lagging behind the actual social needs, it is understandable that there exist such problems in banks' operations. As the creator as well as the bearer of a large amount of non-performing loans, they have to actually make up for the huge difference between the need of social and economic development and the inability of most inefficient state-owned enterprises of meeting it. At the same time, being state-owned enterprises themselves, banks have also long operated with inadequate capital and heavy historical burden. When people are happy to witness that China has become a strong economic power in such a short time, they should fully understand the pressure, difficulties and even crisis that the banking sector has been enduring for promoting this development, and also the significance of further reform of the banking sector to the overall economic reform.

The National Financial Working Conference held in February this year clearly defined the goal for the reform of the state-owned banks. Through three steps, i. e. incorporating, becoming shareholding companies, and going public, we should transform these banks into the modern financial enterprises with good corporate governance, sound operation mechanism, clear operation targets, healthy financial condition, and strong international competitiveness, in line with modern corporate system.

Further reforming the state-owned banks means to continue the existing reform on one hand, and to undertake more complicated and arduous revolution on the other. If we conclude the existing reform that are directed towards financial framework and infrastructure as a basic or initial one, then the current reform with a focal point on corporate governance, a brand new subject to China's business community, should be more advanced and of deeper level. With construction and gradual consummation of the socialist market economy in China, protecting banks' credits and interests should become an important component of the economic order in the Chinese market. In light of that, the state-owned commercial banks should unwaveringly conduct more profound reform and establish sound corporate governance. It should include a clear development strategy and market positioning, an efficient and scientific decision-making process, a prudent accounting system, strict information disclosure and public supervision, and effective incentive and constrain mechanism with well balanced rights, responsibilities and benefits.

Undoubtedly, a difficult transition is involved for the state-owned banks that have just emerged from a central planning economy to operate strictly in line with market principles and regulatory requirements. It not only needs the input of necessary resources (e.g. dealing with NPLs), but also argues for the transformation of corporate concept and culture. New knowledge and concepts constitute a base as well as protection for the new system to operate smoothly. The revolution and innovation undertaken by the state-owned banks is a "ticket" to equal dialogue, cooperation and competition against foreign financial institutions.

China's banking sector urgently needs to learn the experiences and lessons from the international banking community. From Barring incident to the Asian financial crisis to the recent Enron scandal, lessons show that regulation and self-discipline, development and risk control are the basic rules for any enterprises to maintain long-term health and stable operation. Some of the state-owned banks have started various useful reform experiments. They are establishing a whole new set of banking management principles, standards and process, and successfully undergoing corporate and business restructuring by learning effective experience from the international banking industry and adopting market's rules of games. Although there are still many difficulties, problems and obstacles on the road of reform, if they persist in their reform and have the courage to explore, the reformers will be able to gain respect from international banking community as well as initiatives in the market competition.

In a new round of reform and development of the banking sector, the Bank of China, while entering a new development phase, is summarizing up the experiences from its own 90 year history and actively studying the new trend and theories of the international banking development. With a mental attitude of progress with time, the Bank of China welcomes and participates in the reform and is ready to make new brilliant achievements in the tide of history of economic globalization.