The overhaul of the banking system should be a top priority for macroeconomic control in China, a country boasting a big, roaring economy but stymied by loan-backed overheating, a financial expert warned here Saturday.

China's capital markets, including the stock market, have not matured, and banks are still playing a major role in financing, said Qiu Zhaoxiang, honorary director of the Financial Research Institute of the Beijing-based University of International Business and Economics, at an economic forum.

Bank lending has supported excess investment in a raft of red-hot sectors including steel, cement and aluminum, prompting the national government to take steps to cool down the economy. The banking system ultimately suffers from such a roller-coaster in the economy, Qiu said.

In the long run, China should attach importance to the development of capital markets, but in the immediate future priority should be on reforming the banks, he said.

"Whether banks could be positioned, as they should be, as financial businesses in a real sense decides whether they can help rein in the investment scale, adjust the economy efficiently and maintain the sustained economic expansion."

Qiu said that a recent State Council decision on reform of the investment system, aimed at curtailing government interference in financing of projects and businesses, entitles banks to make their own decisions on lending extensions.

The outside factor forcing Chinese banks to be revamped is that the country will grant unrestricted market access to foreign banksby the end of 2006 under a WTO commitment, which is expected to bring fierce competition into the domestic financial market.

In a pilot package, China Construction Bank (CCB) and Bank of China (B0C) will be the first of the country's Big Four to go public, a move the central authorities hope will enhance their corporate governance and sharpen their competitive edge.

CCB's and BOC's non-performing loan ratios by the internationalstandard have already plummeted to less than 3.1 and 5.5 percent, respectively, by the end of June, the best performance among big Chinese banks.

China has another 11 smaller national share-holding banks and 112 city commercial banks, as well as other banking institutions.