China is putting together plans to allow as many as two of its four state-owned banks to launch initial public offerings of their stock domestically and abroad during the next several years, a step that could speed an overhaul of the nation's debt-ridden banking sector.

As part of the plan, which is in the final stages of discussion but hasn't been officially announced, Beijing will use a combination of capital injections and debt-for-equity swaps to substantially reduce the mountain of bad loans the banks now hold, people familiar with the plan say. Though the timing of these measures, and the amount of money involved, remains unclear, the bulk of the nonperforming loans are expected to be transferred to government asset-management companies. A smaller portion will be dealt with through capital infusions, these people say.

At least two of the banks already have hired international auditors, the first step toward an eventual stock listing, industry executives say. Bank of China, widely considered the healthiest of China's four biggest banks, has retained PricewaterhouseCoopers LLP to audit its books, says an executive from the U.S. accounting firm. Industrial & Commercial Bank of China, the nation's biggest bank in terms of total lending, has hired Ernst & Young LLP to review its sprawling branch network, a bank executive said. Both banks already have subsidiaries listed on the Hong Kong stock exchange.

The planned overhaul comes amid a sweeping new push by Beijing to tackle one of the biggest challenges facing China's economy: reform of the decrepit financial sector. In an interview last week, China's top banking regulator, Liu Mingkang, outlined a wide-ranging reform plan, including opening the door wider to foreign investment and passage of China's first bank-supervisory law by as early as the end of the year. Both measures could help address faulty corporate governance that now plagues the banks, a problem that is central to the industry's debt burden.

Though private estimates and official numbers are far apart, China's banks are believed to be sitting on somewhere around $500 billion in nonperforming loans, or just under half the value of the nation's total annual economic output.

Additional measures to improve bank oversight are likely. This week, the new agency that Mr. Liu heads, the China Banking Regulatory Commission, said it had set up 36 new offices around the country, a move made less than a year after the agency itself was formed. Among their tasks, each office will step up lending oversight, ensuring better adherence by Chinese banks to a strict new loan-classification system designed to bring greater transparency to the industry.

Though China's banks aren't believed to be at risk of an imminent collapse, a healthy banking industry is a crucial component of Beijing's goal to maintain speedy but more efficient economic growth, and to generate enough new jobs to keep the nation's workers employed. In the past five years, Beijing has spent nearly $200 billion to fix its bad-loan problem, a legacy of decades of government-mandated lending and, more recently, malfeasance and corruption.

Even so, the nation's banks, by Beijing's official count, remain buried under $375 billion in bad debt. Many economists and other analysts say the problem is far larger, with some estimates as high as $700 billion. Either way, China is now home to what experts call the world's largest potential banking crisis. And the competitive pressures the banking system faces will accelerate in late 2006, when Beijing lifts barriers to foreign banks, as it has vowed to do under the terms of its membership in the World Trade Organization.

Yet for China's banks, stock sales and debt write-offs address only part of their woes. Many banking experts say the banks' biggest problem is the role that Communist Party officials continue to play in the banks' management.

From the four state-owned lenders down to thousands of tiny rural banks, China's banks are almost all government owned, and they report not to independent boards of directors or to shareholders, but to party bosses locally and in Beijing. The result, bankers and industry experts say, is a system often void of accountability, where bad lending decisions regularly go unpunished.

The initial public offerings aren't "the objective, but the means to a worthwhile end," says Fred Hu of Goldman Sachs in Hong Kong. "Given all the political interference, it is very hard to run the banks on a commercial basis. The first step is to change their ownership, and IPOs are a way to achieve that," he adds.

But Mr. Hu warns that stock listings alone won't be enough. In the past decade, more than 1,000 companies controlled by the Chinese government have listed shares at home or abroad, but still remain in poor shape. "They really need to change the corporate culture, corporate governance, risk-management practices and management decisions."

That will take years, if not decades, many banking analysts say. In the meantime, the banks are focusing on easing their debt burdens. By 2006, Industrial & Commercial Bank of China plans to cut its bad-loan ratio to about 10% of its loans outstanding, down from 22% now.

A stock sale, which one ICBC executive says could happen in 2006, most likely would take place simultaneously on domestic and other markets, such as Hong Kong, New York and Singapore. The offering, says the executive, is expected to be so large that "no single market would be able to handle it, even if we were to issue only a small portion of shares."

ICBC also is exploring other ways to reduce its bad-debt ratio, including a plan to peel off some dud loans and package them into bonds with the help of global finance firm Credit Suisse First Boston, a unit of Credit Suisse Group. Details are slim, but the plan, known as "securitization," would involve putting several bad loans together and auctioning off pieces. Buyers would receive interest payments and could trade the securities on a secondary market.

Bank of China officials declined to comment on listing plans, though Chinese media recently reported that PricewaterhouseCoopers is now auditing the bank's various branches, with a goal of listing in 2005 at the earliest. BOC successfully listed a subsidiary, Bank of China (Hong Kong) Ltd., on the Hong Kong Stock Exchange in July 2002.

Another IPO contender is China Construction Bank, which said Tuesday that its nonperforming-loan ratio dropped by four percentage points to 11.92% by the end of September. Though CCB has been cutting its bad loans aggressively, the sharp decline in the bad-debt ratio also is attributed to a surge in new loans issued this year, a factor that essentially makes the bank's older, dud loans shrink as a percentage of all its loans.

The last state-owned bank to be listed is expected to be Agricultural Bank of China. The bank, which traditionally has focused on China's poor, rural regions, says its bad-debt ratio stood at 30% at the end of 2002.

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