The World Bank plans to help the mainland reform its capital markets in response to the Asian financial crisis. The bank's vice-president for East Asia, Jean-Michel Severino, said after three days of talks with senior Chinese officials that it would focus on helping the development of the neglected government bond market. 'We are going to work to help fix this problem,' Mr Severino said. The bank intends helping Beijing develop infrastructure investment funds and use bond financing linked to bank projects to promote greater reliance on private savings rather than government revenues. It is also seeking to avoid the vulnerability caused by sudden withdrawals of capital by portfolio investors or to fluctuating export revenues. Mr Severino pointed to three areas where lessons could be drawn from the crisis. 'China must keep a close eye out on competitiveness,' he said, adding that if it wanted to ensure strength in exports, the government must boost spending on higher education, which compared poorly with neighbouring countries. He urged greater transparency in relations between banks and companies and an emphasis on good governance to avoid corruption. The mainland's capital markets would also be further opened up with World Bank aid to build an institutional ability to cope with future changes and create a reliable supervisory and regulatory system. 'All this has to be done before the financial sector is liberalised,' a Chinese official said. 'Otherwise, it will be very risky.' Mr Severino expressed the World Bank's support for the new government's plans and outlined how the bank's projects would support proposed reforms. This support - in the form of a US$2.5 billion loan - will be widened to deal with urban poverty, health and pension reform as well as education and poverty alleviation. Subsidised low-interest loans to the mainland under the International Development Agency will be phased out by the end of next year. Thereafter, Beijing, the World Bank's largest borrower from 1993 to 1998, will have to draw on financing from the International Bank for Reconstruction and Development for social and poverty projects. Mr Severino voiced strong support for International Monetary Fund programmes in the region. However, he did not say whether stability had returned to the region or whether China would meet its 8 per cent growth target for this year. 'It is too early to say,' he said, pointing to the forecasters who had been wrong about events last year. The Chinese official said this year's challenges were different from those faced in the past 15 years. Asked to comment about government plans to create large industrial conglomerates, the official said some mergers and acquisitions could create competitive companies if they were specialised in one area. However, a careful study would have to be made of the risk to healthy enterprises absorbing loss-makers who would weaken the parent, he said.