China's banking sector made substantial progress last year in its campaign to reduce non-performing loans (NPLs), paving the way for upcoming key reforms.

Non-performing loans at Chinese banking institutions, as measured by the Chinese classification, fell by 157.4 billion yuan (US$18.9 billion) from the end of 2002 to 2.4 trillion yuan (US$289 billion) at the end of last year, while the NPL ratio dropped by 4.69 percentage points to 15.19 per cent, the China Banking Regulatory Commission (CBRC) said yesterday.

A total of 1.59 trillion yuan (US$192 billion) of NPLs belonged to the four largest State-owned commercial banks, a decrease of 131.2 billion yuan (US$15.8 billion) from a year earlier. Their NPL ratio dipped by 4.71 percentage points to 16.86 per cent.

The continued improvement in asset quality is key for China's banking sector, especially the four biggest banks -- the Industrial and Commercial Bank of China, the Bank of China (BOC), China Construction Bank (CCB) and the Agricultural Bank of China -- the reform of which recently entered the fast lane.

The government injected US$22.5 billion of badly-needed capital into the BOC and CCB each early last week in preparation for initial public offerings that are believed to be scheduled no later than 2005.

Chinese banks were frustrated by a rebound in their NPLs last October, which had otherwise been declining since late 1999. CBRC officials have identified two reasons for the NPL rebound as both loans granted in previous years maturing in October and a slowdown in commercial banks' disposal of bad loans as the commission strictly prohibited banks from granting borrowers new loans to pay back their old loans.

Last year's achievement of declines in both outstanding bad loans and their proportion of all loans is "closely linked'' to the banking commission's efficient supervision, including massive inspections and new regulations on things like capital adequacy and internal risk controls, the CBRC said.

Inspection of loans underway

It held three meetings last year with State-owned commercial banks, joint-stock banks and city commercial banks respectively to provide closer guidance on lending to fast-growing industries like real estate, auto, steel and cement.

Investments in those industries grew at high levels last year raising worries about overheating. A huge part of the investments was funded by bank loans.

The commission also conducted inspections into banks' non-credit assets and off-the-balance-sheet operations, especially the commercial paper business and issuance of letters of credit. The results of the inspections had shown a considerable level of risk and irregularities, it said earlier.

NPLs at China's 11 joint-stock commercial banks decreased by 7.7 billion yuan (US$927 million) to 154 billion yuan (US$18.5 billion) at the end of last year, while their NPL ratio fell by 3.03 percentage points to 6.5 per cent, the CBRC said.

The nation's 112 city commercial banks reported a total of 99.3 billion yuan (US$11.9 billion) in NPLs, down by 5.8 billion yuan (US$698 million). The NPL ratio stood at 12.85 per cent at the end of 2003, down 4.87 percentage points from a year earlier.

The more than 35,000 rural credit co-operatives reported the industry's highest NPL ratio at 29.72 per cent, down 7.5 percentage points from the end of 2002. Their total NPLs stood at 504.9 billion yuan (US$60 billion), a decrease of 8.6 billion yuan (US$1.03 billion).

This year, the CBRC's priority goes to the joint-stock restructuring of the State-owned commercial banks and pilot reform of rural credit co-operatives, while ensuring further decline in NPLs, it said.

Under the State Council's reform scheme for the four State-owned commercial banks, the BOC and CCB were chosen last week for pilot joint-stock restructuring.

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