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China announced plans Tuesday to use US$45 billion of its foreign reserves to turn two of its biggest state-owned commercial banks into joint-stock corporations.

The China Construction Bank and the Bank of China are picked to receive the cash. [newsphoto.com.cn/file]

The Bank of China and the China Construction Bank, two of the China's four biggest state-owned commercial banks, are picked to receive the cash to bolster their capital adequacy ratios and move from total state ownership to become joint-stock holding banks, said an official from the State Administration of Foreign Exchange (SAFE).

"The reform aims to turn the two selected banks into commercial banks in the real sense. They will establish standard corporate governance... as well as a good mechanism for fiscal restraint and internal risk prevention," a source at the State Council, China's cabinet, was quoted as saying by Xinhua News Agency.

"After the reform, the two banks would become modern banking companies, featuring sufficient capital, strict internal control, safe operations, good service and good economic returns," added the report.

The capital injections is also expected to precede initial public offerings for the banks, the Shanghai Securities News added, without specifying dates or whether they would list at home or overseas.

"With barriers such as inadequate capital being removed, the two wholly state-owned banks will speed their preparations for stock listings," the Shanghai Securities News said. The Bank of China has said it aims to list by 2005 and China Construction has invited investment banks to vie for a mandate to help it list, perhaps this year.

It added the government would demand strict supervision for the banks to ensure the newly injected capital was properly used.

"Bank officials responsible for the banks' non-performing loans will be punished in accordance with related laws and regulations, as will those who have tried to evade repayment of loans by fraudulent means," the report said, quoting the higly-placed source.

The announcement came amid efforts to modernize China's state banks in preparation for allowing foreign competitors into the industry.

China's four large state-owned commercial banks had non-performing loans (NPLs) of two trillion yuan (US$240 billion) as of late September.

The four -- Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China -- control about 56 percent of all China's banking assets.

The injection left China's foreign exchange reserves, second-biggest in the world behind Japan, at a massive US$403.25 billion at the end of 2003, Xinhua news agency said.

An official with the State Administration of Foreign Exchange said that the plan will not cripple the country's ability of servicing foreign debt or affect the exchange rate of yuan. But some Chinese economists cautioned the move might increase market supply of cash, and may lead to hiked pace of inflation.

NO BONDS SELL-OFF

Meanwhile, a SAFE spokesman denied speculation China had sold large amounts of foreign bonds to pay for the injection.

"This was a once-only allocation of assets and China has not sold forex bonds on the international market," the spokesman said, adding that China was a responsible country which abided by the rules of the international financial markets.

The Bank of China, the country's largest foreign exchange bank, and China Construction Bank, whose books are cleanest of the Big Four, had very sound liquidity after the injection, he said.

China has touted plans to list some of the Big Four -- which also include Industrial and Commercial Bank of China and Agricultural Bank of China -- by 2006.

That year is a World Trade Organisation deadline for China to allow foreign banks unfettered access to a market flush with US$1.3 trillion in personal savings.

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