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S&P cuts estimate of Chinese NPL ratio by 5 percent

Ratings agency Standard and Poor's said yesterday it has cut its estimate on the non-performing loan (NPL) ratio for Chinese banks to 44 to 45 percent from 50 percent.

It also raised its estimate on NPL recovery rate to 20 percent from 15 percent based on recent observations of Chinese banks and asset management companies.

But S&P said the Chinese financial system still needs direct or indirect capital from the government to solve the NPL issue in the short and medium term due to low capital adequacy ratios at these banks.

Chinese banks have become more market-oriented in offering loans, but still need several years to assess the overall asset quality of newly offered loans and their risk control capability, it said.

The ratings agency said the ratio of China's outstanding loans to GDP value rose to 138 percent at the end last year from 88 percent in 1995, reflecting that part of the loans over the past few years have been channeled to inefficient or even loss-making state firms.

According to government figures, China's four largest banks cut their NPL ratios by more than four percentage points in the first six months of the year to an average 22.19 percent by June.

Although this is as much as the ratio fell during all last year, the China Banking Regulatory Commission, which published the data on its website, warned the figure could be deceptive and disguise a serious situation.

"The amount of non-performing loans is still large and the non-performing loan ratio remains high," the commission said.

It pointed out that one of the reasons why the non-performing loan ratio has fallen is the rapid growth of new loans -- and they could theoretically become problematic in the future.

Total outstanding loans at China's major banks rose by almost 13 percent in the first half to stand at 12.95 trillion yuan (US$1.57 trillion) by the end of June.

The `big four' of China's banking system -- Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China -- play a crucial role in the world's fastest growing major economy.

Given the lack of investment options open to the average Chinese, they hold a large part of China's enormous savings and provide the financing that oils the majority of the country's businesses.

In the past, they have been forced to give priority to borrowers among China's large but inefficient state-owned enterprises, which often have been unable to repay their debts, leading to the non-performing loans problem.

China's regulators have given the banks a deadline until 2005 to reduce their NPL ratio to 15 percent.
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