Economic researchers widely expect financial reform to be the cornerstone in China's ambitious economic reform drive as the government makes fresh efforts to improve the market economy.

They said whether the Chinese economy can achieve healthy, stable and sustainable growth will largely hinge on the performance of the financial sector.

Yi Xianrong, a researcher with the Institute of Financial Studies at the Chinese Academy of Social Sciences, described the financial sector as China's last bastion from the planned economy.

"With economic bottlenecks such as the energy, raw material and infrastructure sectors having been removed one after another, the financial sector has become the biggest hurdle to economic development," Yi said.

"Deep-rooted financial problems that are standing in the way to a sound market economy have to be overcome."

The researcher stressed that the financial industry faces tough challenges and long-standing problems despite progress in overhauling the sector during the past two decades.

Lingering problems that still trouble the financial sector mainly include State monopolization, mountains of bad loans burdening State-owned commercial banks as a result of government-mandated financing, rising financial fraud and scams as well as poor quality of listed firms in the stock market.

"Unless these obstacles can be eliminated soon, the Chinese financial market will be left exposed to huge risks, which not only threaten stability and development of the financial sector but may also become the biggest hurdle to overall economic growth," Yi said.

The warning underpinned the top Chinese leadership's strong determination to speed up reform of the financial sector at a recent key meeting of the Communist Party of China (CPC).

In the policy directives endorsed by the Third Plenum of the 16th CPC Central Committee in mid-October, top leaders pledged to deepen reform to help foster a sound financial market.

The document called for sweeping bank reforms aimed at a modern banking system, tougher bank-supervisory steps and the establishment of a free-floating currency regime "in a gradual and prudent way".

Wu Xiaoqiu, director of the Institute of Financial and Securities Studies at Renmin University of China, lauded the decision to push for financial reform as "extremely timely and necessary".

He noted that to set up a mature financial system, which is capable of powering economic growth through adequate capital, is most critical to the fast-developing Chinese economy.

"Furthermore, only through bold reforms can the financial sector get prepared for incoming competition from powerful overseas counterparts as China has promised to give foreign banks free access in December 2006 in line with its World Trade Organization agreement," Wu said.

In 1998, the government injected 270 billion yuan (US$33 billion) into the Big Four State-owned commercial banks - China Construction Bank, Agricultural Bank of China, Industrial and Commercial Bank of China and Bank of China.

In another major bid to fix the bad-loan problem, it took 1.4 trillion yuan (US$167 billion) of NPLs off their books the next year and transferred them to four special asset-management companies for disposal.

But new bad loans have been surging again as average NPL ratios of the Big Four are still estimated to stand at 25 per cent, with bad debt amounting to US$375 billion.

Some independent financial experts put the true figure closer to 40 per cent.

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