Bank of China, this country's second-largest bank, is waking up to the realities of the marketplace.

Senior executives at the state-run bank said they plan to expand both retail and investment banking as part of a drive to improve profits and diversify from a long-standing reliance on corporate business. They added that although the effort is just under way, growth prospects appear favorable.

"The major objective is to develop a network that is market-oriented, build management that is customer-oriented, and maximize profits," said Zhao An Ge, managing director and executive vice president.

Bank of China's changes mirror those of China's other traditionally hidebound state-run banks, which are adopting market-driven strategies amid competition from new banks set up by Chinese companies and investment corporations.

On the investment banking side, Bank of China plans to expand in Asia and Europe. This year it set up Bank of China International Holdings Ltd., basing it in London.

On the retail side, the bank is working to serve affluent customers by developing private banking, asset management, and mortgage banking in both local and foreign currencies, as well as credit cards and international funds transfers for individuals.

"We believe that with the national economy improving, financial reform continuing, and living standards rising, retail banking could be very lucrative," Mr. Zhao said.

As part of a broader program, executives said, the bank has reinforced credit controls, increased spending on information technology, and centralized reporting and auditing as well as treasury, clearing, and settlement operations. Nearly 600 branches have been closed this year; 300 were shut in 1996. More are likely to go, under a plan to concentrate the bank's operations in larger Chinese cities.

Bank of China also hopes to strike more partnerships with foreign financial institutions similar to a joint merchant banking venture it has with First Chicago NBD Corp. in Hong Kong. Mr. Zhao said it was unlikely that the government might privatize Bank of China soon.

Bank of China has several advantages compared with other state-owned banks. Until recently, it was the only Chinese bank authorized to engage in foreign exchange dealings and to expand abroad. The bank still has an edge over local competition in both foreign exchange and trade finance-related activities. And its extensive international network-74 branches in 18 countries, a large presence in Hong Kong and offices in New York-is a significant source of profits.

Profitability remains low, however, at Bank of China, which trails only Beijing-based Industrial and Commercial Bank of China in size.

Net earnings at Bank of China last year reached $635 million, but return on average assets was only 0.25%, according to the rating agency Thomson BankWatch. That's well below levels at most U.S. banks, as well as at new local competitors like China Mercantile Bank, which posted a 2.92% return on assets.

Like other big state-owned banks, Bank of China remains burdened with many nonperforming loans extended to government-owned industrial corporations.

"Bank of China's profitability is mediocre, and its level of capital ... is severely undermined by very poor asset quality and a high level of problem-and ultimately uncollectible-loans," Moody's Investors Service said in a recent report.

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