Beijing prepares for challenge of postal reform

The failure of the Japanese government's postalsystem reform drive this week was a reminder of the difficulties of tinkering with a state service embedded in the lifeof a nation.

But officials inChina dismiss theidea that Tokyo's troubles hold lessonsas they embark on a long-awaited campaign to shake up their sprawling postal system with its tens of thousands of offices and quarter of a million employees.

"We have not paid any attention to the matter (of Japanese postal privatisation)," says an official of the State Post Bureau, better known as China Post. "There shouldn't be any association."

Beijing has reason not to allow any distraction from its plans, announced last month after years of internal debate.

While other arms of the government have modernised, China Post has remained an opaque and bureaucratic hybrid combining the roles of regulator, mail deliverer and one of the country's biggest financial institutions.

Near the heart of the problem lies China Post's savings system, which boasts 260m accounts and 9 per cent of total financial sector deposits.

China Post started taking deposits in 1986 and was initially credited with easing inflation by reducing liquidity, since all its funds were re-deposited with the central bank. Since the late 1990s, however, deflation has been more of a problem for China, and postal savings have been blamed for sucking capital out of poorer rural regions where money is scarce.

The favourable interest rates paid by the central bank have allowed the postal savings system to become a huge quasi-bank, but one with no commercial nous.

Its revenues are vital to China Post, which struggles to make money from deliveries in spite of its status as sector regulator.

"The management system of our nation's postal sector can no longer meet the needs of a market economy, and deepening its reform has become one of our most important and pressing tasks," concluded a meeting of China's State Council, or cabinet, last month.

The State Council plans to turn the postal savings system "quickly" into a real bank – China's fifth largest – while dividing the rest of China Post into a regulatory department and a commercial group.

"The basic thinking of postal system reform is to achieve separation of government and enterprise," it said.

Such separation offers the hope of a more open market for foreign companies such as FedEx, United Parcel Service and DHL.

However, early action may prove easier to promise than to deliver. The State Council has given no details of how the split will be handled or how the Postal Savings Bank will be run.

Yi Xianrong of the Chinese Academy of Social Sciences says progress requires balancing the competing interests of such institutions as the state-owned Assets Supervision and Administration Commission, the central bank, the Finance Ministry and China Post.

"The State Post Bureau does not want to give up the savings system," he says. "It's their most profitable part."

As in Japan and elsewhere, postal bureaucrats say they need income from financial services to meet the burden of a nationwide delivery network with countless rural routes that will never be profitable.

Beijing in 2003 tried to prepare the Postal Savings Bank for a more commercial future by forcing it to invest new deposits in the inter-bank bond market or long-term accounts with other financial institutions.

However, four-fifths of the system's income still comes from its old high-interest deposits at the central bank.

Continuing such favouritism could undermine attempts to restructure the bad-loan-burdened banking system, but nobody imagines that the Postal Savings Bank will be able to compete soon in areas such as retail or commercial lending.

Still, reform in China should be easier than in Japan. Beijing has not mentioned privatisation and China Post is a minnow compared with the Japanese post office.

The Japanese postal system has an ingrained role in the country's democratic politics as a vote-gathering machine and was able to muster parliamentary opposition to reform. Such opposition is unlikely in China.

Mr Yi of CASS says Beijing's reform scheme should succeed.

"In China it's a bit easier to push this kind of change. It's just an issue of judging the various interests," he says.

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