THE head of China's central bank has confirmed that foreign banks in the country will gradually lose their tax privileges as state-run commercial banks open up to greater competition. 'We will gradually introduce a level playing field for Chinese and foreign banking institutions,' said Dai Xianglong, governor of the People's Bank of China, yesterday. Foreign and Chinese banks would eventually have the same conditions in terms of tax requirements and scope of business, he said. 'Currently, the large commercial banks in China have a tax rate of 55 per cent while the foreign banks which operate in the country only have a tax rate of 15 per cent. 'So gradually we will introduce the same treatment for all financial institutions, both Chinese and foreign.' Mr Dai said foreign banks would eventually be allowed to engage in local currency business. 'After a period of experimentation, we will then gradually allow foreign financial institutions to have local currency business,' he said. He did not specify the length of the experimental period. The central bank would open more cities to foreign banking institutions and allow the country's main commercial banks to form partnerships with overseas institutions, he said. Mr Dai and his deputy, Zhu Xiaohua, both indicated that the reform and opening up to competition of the commercial banking sector would not happen overnight. Although China's new banking law meant the state-run commercial banks were technically liable for their own debts, Mr Zhu said the state still felt responsible for their liabilities. 'I'd like to reiterate that, ultimately, all these debts held by state-owned banks will be backed by the state,' Mr Zhu said. Mr Dai stressed that reform of the commercial banks would have to be accelerated if they were to compete in a more open market with foreign banks. He defended the recent record of the state-run banks, saying most of them should be recording profits by the end of the year. Mr Dai said many banks had recorded insignificant profits so far this year because of the government's policy of providing index-linked savings deposits. Interest from long and medium-term loans was only calculated at the end of each year under China's accounting system, giving a skewed picture of banks' mid-year profitability, he said. 'All banks have improved their operations this year and therefore they should all be showing profits by year's end,' Mr Dai said. On the question of currency convertibility, Mr Dai reiterated that China hoped to establish free currency convertibility on the current account by 2000. He backed away from earlier comments made in Singapore that convertibility could be achieved in just three years. 'Of course, I hope we can achieve free currency convertibility as quickly as possible, but I am unable to say we can do that in three years,' he said.