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Cutting China's NPL ratio `arduous'

Chinese construction workers walk past the main office of the People's Bank of China in Beijing yesterday. Regulators said they would watch the country's lending more closely after a boom in landing last year led to a brief spurt of inflation. PHOTO: AP

China's banks have made great strides in cutting their non-performing loans (NPLs), but finishing the job remains an "arduous" task, the country's top industry watchdog said yesterday.

Even as the country's state-run lenders try to rid themselves of old NPLs, new ones are still emerging, Liu Mingkang (劉明康), head of the China Banking Regulatory Commission, told a briefing in Beijing.

"Our fight against NPLs will be an arduous and long one," the former deputy central bank governor said. "That's why we are trying very hard to foster a credit culture among our banking institutions."

China's state banks can ill afford an explosion in bad debt, as they are estimated to already be saddled with at least 3 trillion yuan in NPLs, or one quarter the size of the entire national economy.

Liu said the reduction in the banks' average NPL ratio to 17.8 percent from more than 23 percent in the course of last year was less of an achievement than it seemed.

Much of it had simply come about as a wave of new lending diluted existing NPLs, he said.

Each time the NPL ratio falls by 5 percentage points, the expansion of credit accounts for four percentage points, he said.

Alarm bells have been ringing in recent months about real estate, where it is feared a bubble is developing, despite measures by the authorities to curb lending for the sector.

However, Liu said the new perils for the banks were not limited to one industry.

"The risk is not only in the property area," he said. "We're also facing risks coming from auto loans and credit cards.

"If the banks fail to identify, assess and gauge the assets risk, it could be very perilous for the entire sector."

The Chinese government late last year made a concrete contribution to the solution of the NPL problem, taking US$45 billion out of its foreign exchange reserves and handing it to the state banking industry.

The money was shared evenly between Bank of China and China Construction Bank, which both plan a stock market listing but have to make themselves more attractive to investors before doing so.

Liu said the US$22.5 billion cash injection each bank received in December to kick-start their reforms would be the last hand-out from the government.

"There will be no new cash injections for the Bank of China or China Construction Bank from foreign exchange reserves," he said.

Liu, who came to the banking commission from a post as president of the Bank of China, the country's largest foreign exchange bank, said he understood the problems of the sector, which is why he had to be tough on the banks.

"You could compare me to a referee who used to be an athlete. That's why I understand perfectly the mentality and the desire of the athletes," he said.

"After all the training and practicing, once they participate in professional games, they won't suffer injuries, they won't break the rules and they won't lose."
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