The State Council, China's cabinet, has decided on a reform package for the four State-owned commercial banks, a top banking regulator said Monday.

"We would choose one or two banks as an experiment, before we carry out a comprehensive reform of the four,'' Liu Mingkang, chairman of the China Banking Regulatory Commission, told a press conference.

Liu's remarks are largely in line with the ones made by the central People's Bank of China Governor Zhou Xiaochuan earlier this year that the central government has approved a bailout programme for the four banks.

The Big Four -- the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China and the China Construction Bank -- remain the backbone of China's banking sector, holding 56 per cent of total outstanding loans.

Liu declined to give details of the plan, but said "a variety of methods'' will be used to dispose of the Big Four's non-performing loans (NPLs), which, at the end of September, were close to a staggering 1 trillion yuan (US$120 billion) or 21.4 per cent of their combined loans . Then "various ways'' will be used to improve their capital adequacy ratios while internal reforms and restructurings proceed.

Liu said officials will be "seeking assistance from international intermediaries and attracting qualified overseas institutional investors.''

China injected 270 billion yuan (US$33 billion) into the Big Four in 1998 and sliced 1.4 trillion yuan (US$168 billion) in non-performing loans off the banks' balance sheets to create four asset management companies the next year.

But officials believe the banks' capital adequacy ratios have since slipped back below the 8 per cent minimum requirement as loans expanded.

The slip marked an urgent need to solve the "legacy problem'' before the nation fully opens up the banking sector in 2006 under its World Trade Organization commitments, analysts say.

Standard & Poor's said earlier this week that a key condition to raising credit ratings for the four banks is a further capital injection.

"If institutions are to improve their credit profiles sufficiently to warrant higher credit ratings, they must adequately recapitalize and further improve their asset quality,'' it said in a report.

The current credit ratings by Standard & Poor's on the Big Four are BBpi for the Agricultural Bank of China and BB plus for the other three, all below investment grade.

Chinese banks are facing growing competitive pressure from foreign banks, which were allowed yesterday to provide renminbi services to Chinese enterprises in 13 cities and now have greater freedom to acquiring equity shares in their Chinese counterparts.

Liu said the relationship between Chinese and foreign banks has evolved from pure competition to a level of both competition and co-operation.

Such co-operation allows foreign banks to penetrate the market faster and gives Chinese banks access to the technology, expertise and experience they need.

More importantly, he said, customers will have access to a broader selection of banking services.

"So it's a win-win-win situation,'' Liu said.

"I believe, as history suggests, that the Chinese financial industry will change pressures into fresh impetus and come up with better products and services.''

The official cited examples, including the Bank of Shanghai which is now 18 per cent owned by foreign investors, to demonstrate how foreign participation can bring about improvements in the management of Chinese banks.

The Bank of Shanghai now has a 10.6 per cent capital adequacy ratio and a 30 per cent ratio of non-performing loans.

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