A spokesman for the People's Bank of China (PBC - central bank) has told local media that punishments have been meted out by state-owned commercial banks to 538 people who have allegedly extended fictitious letters of credit or committed other bank frauds. Under instructions from PBC, the commercial banks have expelled 173 people from the banking sector.

The spokesman said the commercial banks have carried out the punishment under the instruction of the central bank. Of those punished, 173 have been expelled from the banking sector.

Warnings issued

Last year the central bank sent China's banks a communiqué that specifically demanded they investigate their L/C activities and several other areas of their business. The spokesman is reported to have said the state-owned banks have paid close attention to their modus operandi for conducting L/C business and have introduced measures to standardise the way credits are opened. Related risks are now under control he said.

Bank officials have been motivated to review their practices from the highest level. China's Premier has publicly stressed the importance of tighter financial supervision and internal control.

Premier endorsement for reforms

Chinese Premier Zhu Rongji said in January at a national seminar on banking, securities and insurance that financial reforms are a priority this year. Despite its contribution to China's economic recovery last year, problems and potential risks inherent in the financial sector cannot be ignored.

Zhu emphasised the need to continue strengthening and improving financial supervision. He said that banks, securities agents, insurance companies and other financial institutions should establish and perfect internal control systems. They should also conduct rigorous appraisals of senior executives.

Calls for tougher regulators

As well as the central bank, the China Securities Regulatory Commission and the China Insurance Regulatory Commission should regulate the institutions they supervise very tightly. People found to be irresponsible, slack in supervision or derelict in their duty should be dismissed from positions of responsibility according the Premier. He also warned that financial institutions that continue in breach of the law and regulations should be severely punished or even closed.

As well as ironing out problems in the financial sector, the premier said the state is to utilise new technologies to strengthen supervision and control on capital, currency and foreign exchange. Efforts to crack down on fraudulent foreign exchange dealings and illegal foreign currency trades will also continue said Zhu.

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