Big local govt debt to dampen banks' profits

BEIJING - The latent risk embedded in the massive loans borrowed by local government-backed investment entities might dampen the profitability of China's banking sector by 7.9 percent between 2010 and 2012, a government think tank report said.

The 2010 Blue Book for China Finance, the annual report on China's financial development compiled by the Chinese Academy of Social Sciences (CASS), forecast that Chinese banks would need to set aside 283.1 billion yuan ($41.6 billion) as bad loan provisions over the next two years, which may reduce Chinese lenders' net profit.

The forecast was based on the projection that the bad loan ratio for lending to local financing vehicles will climb to 3.36 percent, with 13.46 percent of loans being in the special attention category by 2013.