Central bank chief Zhou Xiaochuan says loss, not foresight, is often the driving force behind necessary change A rash of scandals is not necessarily a bad thing when it provides an incentive for reform of the mainland's state-owned banking system, according to the central bank governor. People's Bank of China chief Zhou Xiaochuan told the China Economic Summit in Beijing yesterday that a series of banking scandals had exposed flaws in the system and had resulted in the introduction of reform measures. 'Even from a worldwide perspective, the incentive for improvement and reform often comes after people have suffered losses rather than from foresight,' he said. Mr Zhou identified the scandals as one of four 'incentives' driving reform of the mainland's banking system. Shareholders' interests were another factor, he said, after the central government introduced the joint-stock system into state-owned banks, adding that pressure from shareholders, investors and the stock market could be turned into momentum for reform. The exposure of a string of scandals in listed banks put pressure on the government and the industry regulator to speed up reform, he said. 'Some major holders [of the listed banks] would make use of flaws in the system, particularly in the rules on provisions, to create artificial profits and to manipulate market prices, and finally cheat small investors,' he said. 'However, such malpractices would eventually come to light' and create pressure for improvement in the system, he said. Economic crisis was also another incentive for reform. 'We have made tremendous efforts to improve the system after the Asian financial crisis,' he said. The fast pace of economic globalisation in recent years had created fiercer competition among businesses worldwide and another incentive for reforms to promote the competitiveness of domestic banks. 'Globalisation and competition from multinationals calls for the promotion of standards and the updating of the domestic banking system,' Mr Zhou said. The central bank governor said the key criterion to measure whether banking reform was a success was the extent to which Beijing could contain the growth of non-performing assets in the sector. He said that even correct decisions on credit, loans and asset management by bankers could result in the creation of non-performing assets as a result of changes in customer and market environments, including economic circumstances, government policies and the international setting. 'Commercial banking is a kind of risk industry, and thus improvement in the regulation of provisions systems is the key to the success of banking reform,' he said.