MNI INTERVIEW: China Needs Financial Insolvency Law: PBOC Offl

--Need For Beijing To Legislate For Financial Firm Bankruptcies: Bai

     BEIJING (MNI) - China urgently needs to pass legislation allowing financial

institutions to go bankrupt if it is to proceed with market-oriented interest

rate reform, improve financial market competition, minimize risks and protect

investor interests, a People's Bank of China official told MNI in an interview.

     "Considering the complexity and spillover risks from the collapse of a

financial institution, this law needs to be enacted as soon as possible," said

Bai Hexiang, a delegate at the 13th National People's Congress and the president

of the PBOC's Guangzhou branch.

     The current clause on financial institutions in China's Enterprise

Bankruptcy Law is not operational for the bankruptcy of financial institutions

in practice. As a result, when financial institutions have run into difficulty,

authorities have attempted to limit the impact on their clients and

counterparties by pushing them into reorganisations or mergers, a procedure

which is inefficient and expensive, Bai said.

     Policy makers have reached consensus on the need for bankruptcy proceedings

to cover financial institutions, as China continues to move towards gradual

market-oriented reform, Bai noted, adding that current rules on deposit

insurance cannot cover financial institutions other than banks.

     Last month, the China Banking and Insurance Regulatory Commission,the top

banking and insurance regulator, said it would allow certain, particularly small

and medium-sized, institutions, to pilot a bankruptcy mechanism.

     Bankruptcy procedures, including provisions for courts to dispose of

assets, will better protect investors and enhance the stability of the financial

system, particularly of the banking system, which is riddled with information

asymmetry and moral hazard, Bai said.

     "It is also a requirement of market-oriented interest rate reform," Bai

noted, explaining that more market-based interest rates will make competition

fiercer and increase uncertainty over liquidity.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MT$$$$,MX$$$$]