When the four State-owned banks retreated from rural areas in an attempt to improve their business performance, shutting down branches in small towns and remote counties, local financial markets slumped as the big cities amassed more financial resources.

One of the important tasks in the financial restructure of the State-owned banks was to forge more prudent policies about granting loans and to conduct stricter surveillance on existing loans.

Therefore, loans granted by the four State-owned banks witnessed a slight decrease in 2004 and 2005, while other commercial banks snatched bigger market shares in 2005.

This situation changed when BOC, CCB and the ICBC finished their financial restructuring and went public, one after the other.

In the first three months of the year, the country's banks loaned 1.26 trillion yuan (US$155 billion) more than half the expected bank loans for the year, 2.5 trillion yuan (US$309 billion). A large proportion of the loans were made by the four State-owned banks.

This drastic turnaround in credit policy by the State-owned banks originates primarily from the huge difference between their deposits and loans, which represents massive debt for the banks unless it's used appropriately to make profit.

But more importantly, this U-turn in their business strategies stems from the changing functions of the State-owned banks.

As public companies, the State-owned banks have to earn more profit for shareholders while maintaining the value of the State-owned assets that were under their management before the IPO.

With profit the chief target, the State-owned banks must increase loans, revenue from which is the major source of profit for domestic banks.

The State-owned banks are following their own business logic as shareholding companies, despite the central bank's attempts to tighten control over bank loans through guidance and issuing earmarked notes both non-punitive means to guide commercial banks.

On the one hand, they now have the same business goals as other commercial banks liquidity, security and profitability. They put more money into bank loans or the inter-bank lending market for profit.

On the other hand, the State-owned banks will probably no longer play the same role supporting the country's financial sector and supplying public goods in the financial field.

It is expected that changes will take place in the business operations of the State-owned banks after they float on the capital market.

These changes will decide their performance in the future and the overall economic development trend. A close watch on the State-owned banks is indispensable to judge the economic situation of China.

The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences

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