Standard & Poor's yesterday said it had revised its estimates for the level of bad Chinese banking assets largely due to rapid increases in loans, but cautions that capital injections are needed to reduce bad assets over the near to medium term.

The rating firm lowered its estimates of impaired assets to 44-45 per cent of total loans from almost 50, and the average recovery rate on impaired assets in China to 20 per cent from 15 per cent.

"The primary reason behind the adjustment in the estimate of impaired assets is rapid loan growth, estimated at over 13 per cent, in the half year through June 2003,'' it said in a report entitled China Financial Services Outlook 2004, which was released yesterday.

"This growth enlarged the system's loan base and consequently the denominator of the country's impaired asset ratio,'' it said.

Total outstanding loans jumped by 23.6 per cent on a year-on-year basis to 16.73 trillion yuan (US$2 trillion) at the end of last month, as banks stepped up lending operations on the back of recovering economic activity.

Standard & Poor's said its definition of impaired assets in China is far broader than non-performing loans. It also includes things like uncollectable interest receivables and equity received through debt-for-equity exchanges.

The nonperforming loan ratio of China's four State-owned commercial banks (Big Four) -- the Industrial and Commercial Bank of China, the Agricultural Bank of China (ABC), the Bank of China and the China Construction Bank -- stood at 21.4 per cent by the internationally accepted five-category classification at the end of September, official statistics indicated.

The current credit ratings by Standard & Poor's on the Big Four are BBpi for the ABC and BB plus for the other three.

The rating company said if Chinese banks are to achieve reasonable levels of nonperforming loans, loan loss provisions, and capital adequacy over the medium term, further government support will likely be required.

"If institutions are to improve their credit profiles sufficiently to warrant higher credit ratings, they must adequately recapitalize and further improve their asset quality,'' the report said.

The Chinese Government injected 270 billion yuan (US$32.5 billion) of capital into the Big Four in 1998, before it created four asset management companies to take over 1.4 trillion yuan (US$169 billion) of nonperforming loans from them the next year.

Earlier media reports said the government is considering a further recapitalization, but details are unknown.

The firm also said it had assigned long-term public information local currency credit ratings to eight Chinese banks, expanding its rating coverage of China's financial institutions in response to continuing investor interest.

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