China's banking watchdog announced last week that it would audit the services category in the balance sheets of the Big-Four State-owned commercial banks, which are already being audited by the Ministry of Finance.

The new audit, the first by the China Banking Regulatory Commission, will focus on services such as loan guarantees and discounting and will spell out the potential risks of creating new non-performing assets, according to the commission.

Most of the services are related to listed companies in the two domestic stock exchanges in Shanghai and Shenzhen, said insiders.

It is common for a listed company to vouch for another listed company to obtain loans or other financial services from banks.

However, if the chain of guarantees ends at the Big Four banks, they will finally have to bear all the risks - the last thing CBRC wants, said insiders.

"If there are such vouching chains among domestic listed companies, it will be very risky for the Big Four, for these risks can rapidly turn to be non-performing assets on the balance sheets at any time," said an official of the CBRC, who did not want to be named.

"The result of the audit is not the final goal. The CBRC will take measures to push the Big Four to strengthen management on such categories soon after the audit," the official said.

Figures indicate that the existence of guarantee chains among domestic listed companies are not just a figment of imagination.

According to incomplete calculations based on announcements made by listed companies in the Shanghai Exchange, about 63 listed companies participated in vouching activities in the period between early May to June 19, according to analysts.

The under-investigation case of Shanghai-based New Nongkai Global Investment Ltd, one of the top land developers in the country, might be an example of a broken link on a possible vouching chain among listed real-estate companies in Shanghai, analyst said.

The domino effect caused by the collapse of the real-estate giant has led to several real-estate shares nosediving in the past weeks, according to analysts.

(HK Edition 07/04/2003 page1)