If you give someone a second chance, you really hope that they've learnt from the mistakes that got them into trouble the first time around. That's especially the case when you're trying to move your economy onto a more financially sound footing, and even more especially once you've poured in hundreds of billions of dollars to bail out your banks. But it appears old habits die hard in China's major banks:

China's Big Four banks are still lending indiscriminately to state-owned firms instead of pricing their loans according to the commercial risks they are taking, a new International Monetary Fund working paper says...

Podpiera concludes that reform at the state-owned commercial banks (SCBs) still has a long way to go. Banks have been allowed since October 2004 to charge as much as they like on loans. But official data shows that in the fourth quarter last year virtually no corporate client of the SCBs paid more than 1.3 times the central bank's benchmark rate. Nor does the profitability of state- owned enterprises make a difference to bank lending, which Podpiera finds is driven mainly by the availability of savings deposits to lend out. Indeed, he says SCBs lend less in China's more profitable provinces, where other financial institutions have gained market share...

Although the banks have lent heavily to sectors that are suffering over-investment, such as steel, cement and construction, Podpiera notes that only 2 percent of loans made since 2000 have turned sour compared with perhaps 45 percent of pre-2000 loans. A slower pace of lending compared with the 1991-1995 credit boom might explain part of the difference, but Podpiera wonders whether banks are assessing their loan books rigorously enough.

"There is a striking difference between the reported credit quality of old and new loans, suggesting either a dramatic improvement of the underlying credit quality since 2000 or measurement problems," he says. To make the banks more market- minded, Podpiera says the authorities must avoid interfering in lending decisions for policy reasons.

It would be a major test for supervisors to ensure that all banks meet new capital adequacy requirements by the 2007 deadline. At the end of 2004, banks accounting for only 48 percent of commercial bank assets were in compliance with the rules, and there was a shortfall in provisions for loan losses of 960 billion yuan, Podpiera says.