Beijing wants to operate CDB and the two other policy lenders - Agricultural Development Bank of China and the Export and Import Bank of China - along more free market rules to reduce bad lending practices.

China Investment Corp chairman Lou Jiwei said last week that the sovereign wealth fund would invest a third of its assets, amounting to between US$60 billion and US$70 billion, in China Development Bank and Agricultural Bank of China, a state-owned commercial lender.

CDB yesterday signed an agreement with Central Huijin, an investment arm that the CIC acquired from the People's Bank of China before the fund was established in September.

'The injection is a fundamental step to transform China Development Bank into a fully-fledged commercial bank,' the central bank said. 'It helps lift the capital adequacy ratio of CDB significantly.'

CDB is owned by the state, with the Ministry of Finance acting as its representative. The announcement gave no details about whether CIC will occupy board seats or have a hand in daily management.

The mainland's banking watchdog has ordered the three policy banks to achieve a capital adequacy ratio of 8 per cent this year, in line with other commercial lenders.

Analysts say the injection into CDB will help meet that requirement but Export and Import Bank of China and the Agricultural Development Bank of China still fall short.

The value of CDB's net assets will increase from 158 billion yuan to about 300 billion yuan after the capital injection from Central Huijin.

'CDB has been directed to conduct many policy loans overseas and the capital injection could help to decrease risks when dealing with international partners,' said Bonnie Chan, an analyst at China Construction Bank. 'But its role as a policy bank will stay unchanged.'

In July, CDB entered into an agreement to invest up to Euro9.8 billion (HK$112.4 billion) in British financial group Barclays to help fund its takeover bid for Dutch bank ABN Amro.

Although that bid ultimately failed, the transaction was the largest overseas investment in history by a mainland entity.

Market watchers said the latest capital injection into CDB could pave the way for CIC to invest up to US$40 billion in Agricultural Bank of China. Agricultural Bank and Agricultural Development Bank of China are separate entities.

Agricultural Bank, which had a non-performing loan ratio of 23.55 per cent at the end of last year is the last state-owned commercial lender yet to be bailed out by Beijing.

It was earlier reported that the restructuring of Agricultural Bank will begin early this year, pending approval from the State Council.

The bank will likely follow the restructuring steps of other big commercial banks in a move that will include cash injections from the government, wiping out non-performing loans, setting up shareholding companies, introducing strategic investors and finally seeking a public listing.

Shot in the arm

CDB's net asset value will increase from 158 billion yuan to, in yuan 300b