China will start nationwide inspections on the operations of the big-four state-owned commercial banks. The banking watchdog will urge the banks, which are deeply involved in an impaired assets mess, to develop a more powerful risk control system.

The China Banking Regulatory Commission said yesterday that it will begin the examination on Monday.

The four lenders are the Industrial and Commercial Bank of China, Bank of China, China Construction Bank and the Agricultural Bank of China, which control a combined 65 percent of assets in the domestic banking industry.

"The banks will be urged to set up more cautious and scientific risk control systems," said the CBRC in a statement. "The classification of loans and non-credit businesses will be investigated."

The Ministry of Finance has asked banks in China to classify their loans in line with a new system with five categories - pass, special mention, substandard, doubtful and loss.

The five grade classification can help banks better assess their lend-ings quality, said industry officials.

The old system, which is being phased out, classified problem loans as past due, doubtful and bad.

"The new definitions are similar to systems adopted by most developed countries," said Terry Chan, a Standard & Poor's analyst.

State-owned commercial banks were originally scheduled to apply and report NPLs under the new loan classification system as of 2001 while other banks were required to apply the new system as of 2002.

"However, in reality, there are still banks that have not complied with these requirements," said Chan.

The CBRC said the examination will also focus on the fast growth of lending in the first half of this year.

Financial institutions on China's mainland extended loans worth 1.89 trillion yuan (US$227.71 billion) in January-July period, compared with 1.85 trillion yuan in 2002, according to the People's Bank of China.

The CBRC investigation will demand the banks to explain their lendings growth amid fears of an overheated economy due to swelling lendings.

"The excessive lendings would encourage firms to duplicate their projects, especially in the steel and textile sectors," said Qiu Xiaohua, vice deputy director of the National Bureau of Statistics of China.

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