UPDATE 1-Chinese banks' bad loans drop, focus now on strategy

(Recasts with details, quotes)

BEIJING, Jan 18 (Reuters) - China's banking regulator on Friday laid out its priorities for 2008, saying that it would focus on helping commercial banks sharpen their operations by improving their strategic planning, innovation and services.

In a summary of the proceedings of the China Banking Regulatory Commission's annual work conference, a reference to further efforts to do away with bad loans, regularly highlighted in past years' work plans, was conspicuous by its absence.

Instead, at a time when many U.S. and European banks are preoccupied by subprime mortgage woes, the agency's chairman Liu Mingkang offered a plan to help Chinese banks become more competitive in an increasingly open market.

"Five years ago, the state banks were technically on the verge of bankruptcy, but now they are large commercial banks with international recognition," the work report cited Liu as saying.

"Through regulatory guidance and support, we will strive to realise a tangible and noticeable improvement in the banking industry's competitiveness within three years," he said.

Beijing has spent some $500 billion over the past decade to clean up its banking sector, shifting their bad loans to special asset management companies and injecting tens of billions of dollars into a few key banks, which were subsequently restructured and went public.

The four biggest banks that have undergone that reform -- Industrial and Commercial Bank of China (601398.SS)(1398.HK), Bank of China (3988.HK)(601988.SS), China Construction Bank (0939.HK)(601939.SS) and Bank of Communications (3328.HK)(601328.SS) -- had an average non-performing loan ratio of just 2.87 percent at the end of 2007, Liu said.

Major banks, which the CBRC classifies as the big state-owned lenders plus 12 joint-stock ones, saw the ratio fall to 6.7 percent at the end of 2007, compared with 7.51 percent a year earlier and 23.6 percent at the end of 2002.

Major banks made 298.7 billion yuan ($41.2 billion) in profits last year, Liu said. That marked growth of nearly 24 percent from a year earlier.

Now that Chinese banks have cleaned up their books, the CBRC will lend support to them to branch out overseas, Liu said, without providing details.

Chinese banks had established more than 60 branches abroad by the end of 2007, the CBRC said, while five of them had invested in or taken controlling stakes in nine overseas lenders.

Liu added that the CBRC would learn a lesson from the U.S. subprime mortgage problems, and step up its own risk management of innovative products.

The agency investigated 79,200 bank branches in 2007 and discovered 860 billion yuan involved in irregular operations, he said. ($1=7.2418 yuan) (Reporting by Zhou Xin and Jason Subler; Editing by Tomasz Janowski)