S&P sees more bad loans in China

"The concern is that the problem loans might grow even faster."

Manggi Habir, head of financial services ratings for Standard and Poor's

Standard and Poor's (S&P) said yesterday that it expects China's economic growth to slow to about 7 or 8 percent this year as the government's tightening measures generate a "soft landing" -- but the firm also sees a likelihood of an increases in loan defaults.

The slowdown in growth -- from 9.1 percent last year and 9.8 percent in the first quarter of this year -- would reflect timely action by the Beijing government, the agency said.

"I think the government acted quite early on and as a result of that we feel that the slowdown will happen in a more orderly way rather than a very, very abrupt slowdown," said Manggi Habir, head of financial services ratings for S&P.

But Habir warned that a slowdown in the Chinese economy could cause new problem loans to emerge in China's severely troubled banking sector.

These loans have mainly been made to small and medium-sized enterprises and to high-end residential developers, some of which can't make payments, S&P said.

Habir said that joint stock commercial banks, rural and urban credit cooperatives and urban commercial banks, which have experienced higher than average loan growth, will be responsible for most of the new problem loans.

"We expect that as the economy slows down in the future, non-performing loans will not go down further," Habir said.

The ratings agency lowered its estimate of impaired assets in China's banking sector to about 40 percent of total system loans at the end of last year -- from 45 percent in the middle of last year.

As new non-performing loans start cropping up, the central People's Bank of China is unlikely to raise interest rates in the short term, according to Habir.

"The concern is that the problem loans might grow even faster because borrowers would have higher interest expenses that they would have to pay to the banks," Habir said.

Speculation about an imminent Chinese decision to raise interest rates has been growing, partly fueled by public comments by ranking decision-makers.

Chinese Vice Finance Minister Lou Jiwei (樓繼偉) said last week that an interest rate hike might be an option if the measures taken so far turn out not to be enough to cool down the economy.