The State Council has decided to choose two major state-owned commercial banks, the Bank of China and China Construction Bank, for pilot reform to turn them into joint-stock banks, a source said Tuesday.

Solely state-owned commercial banks have made great contributions to the country's economic development, economic restructuring and social stability over the past years. But they are sustaining a high ratio of bad assets and low capital sufficiency, due to structural flaws and some historical factors.

In recent years, these banks have speeded up reform steps with the support of the government, and have made marked improvement in the quality of bank property and profit-making capability, paving the way for transforming state-owned commercial banks into joint-stock banks, said the source with the State Council.

The reform aims to turn the two selected banks into commercial banks in the real sense. They will establish standard corporate governance and an internal system of clearly defined rights and responsibilities, as well as a good mechanism for fiscal restraint and internal risk prevention.

Under the reform plan, the two banks are required to launch financial regrouping, quicken the pace to solve the problem of bad assets, increase the ratio of capital sufficiency, lay a solid financial foundation, and set strict financial standards, the source said.

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.

The source said the key to success lies in the establishment of good corporate governance and the transformation of the operation mechanism. Thus, standard shareholders meeting, board of directors and board of supervisors will be formed, and domestic and foreign strategic investors introduced.

The State Council has decided to allocate US$45 billion of the nation's foreign exchange reserve to supplement the capital of the two banks, while at the same time exercising stricter external supervision and examination to ensure the safety of the newly-added capital and good economic returns.

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, according to the source.

(Xinhua News Agency January 6, 2004)