Wed, May 18, 2005 - Page 11 News List

China may face bad debt crisis, central bank governor says


China's central bank Governor Zhou Xiaochuan (周小川) said yesterday that efforts at deepening banking reform would be tested during the next economic downturn and expressed fears that a debilitating problem with non-performing loans (NPLs) could return.

"China is a transitional economy," Zhou told the Fortune Global Forum.

"In the reform transition we are improving banking quality; it is not very sure whether the reform will reach the presumed target or not, but the reform direction is good," Zhou said.

Business cycle

"It depends on the business cycle. Recently we have had a good cycle. The test of the reform probably will happen in the downside cycle to see whether the NPL problem will substantially rebound or not," he said.

Zhou said that 70 to 80 percent of China's banks were in relatively good health, but there was still a problem with 30,000 rural credit cooperatives which maintain relatively low banking standards.

Outstanding loans

In January, the China Banking Regulatory Commission (CBRC) said outstanding loans at the four main state-owned commercial banks fell 349.9 billion yuan (US$42 billion) from the end of 2003 to 1.57 trillion yuan at the end of last year.

On Monday, the CBRC reported that outstanding NPLs in China's banking sector in the first quarter to March fell 3.56 billion yuan to 1.83 trillion yuan.

International economists have long estimated that China's banking system has a bad debt burden of as much as US$400 billion.

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