STRONG government backing and a key role in major state investments have earned the State Development Bank of China (SDB) a BBB long-term foreign currency rating from Standard & Poor's. The United States credit rating agency said yesterday its outlook on the bank was positive because, as the most important of China's three policy banks, it would play a central part in the government's efforts to commercialise state banks. 'SDB is expected to enjoy strong sovereign support as it plays an increasingly important role in China's financial reform programme,' the agency said. 'Successful financial reform will be instrumental in supporting prospective improvement of China's creditworthiness over the next several years.' The BBB rating means that SDB has an adequate capacity to pay interest and principal on a loan in a timely manner, but investor protection levels could be weakened by adverse changes in circumstances and economic conditions. The positive outlook indicates that Standard & Poor's may raise the rating later. SDB, set up in 1994, reports directly to the State Council. Its mandate is to carry out major portions of the government's investment programme and to assist in gradually freeing the country's four specialised banks from the responsibility of making policy loans. The rating agency said SDB's profitability would probably be constrained by its limited autonomy to select projects and the likely poor quality of its loans. SDB provides long-term loans, at market and subsidised interest rates, to large, state-controlled projects in priority basic industries, infrastructure and strategic sectors that are not commercially viable. Most of its loans are inherited from disbanded state investment funds. 'Capital preservation will significantly depend on the SDB's capacity over time to ensure adequate financial performance, which should be supported by strong investment demand underpinning China's rapid economic development,' the agency said. The bank funds itself with capital from the state or with bonds. The state sets the amounts and terms of the bonds and distributes them through mandatory allocations to other financial institutions. The other policy banks are the Agricultural Development Bank and the Export and Import Bank of China.