A slowdown in China's economic growth may put the country's smaller banks at risk from more bad-loan problems than their State-owned giant counterparts, Standard & Poor's warned yesterday.

The credit rating agency said the next round of non-performing loans (NPLs) is likely to come from overstretched small- and mid-sized enterprises and high-end residential property developers.

However, it reduced the estimate of impaired assets of the country's banking sector to about 40 per cent of total system loans at the end of last year from 45 per cent in mid-2003.

The revision has taken into consideration the banking sector's 6.6-per-cent loan growth in late 2003, and continued efforts by banks to write down and recover NPLs, Manggi Habir, director of financial services ratings of S&P said at a teleconference yesterday.

China has adopted macro adjustment policies, including increasing the reserve requirement ratio and tightening control of land use, to slow the pace of investment in certain industries such as steel, aluminum, cement and real estate.

Habir said he expected the central government's recent selective tightening policy would achieve an economic soft landing. "But I am more concerned about the quality level of loans by the smaller banks which have been more aggressive to grow business than the State-owned banks," he added.

Smaller banks, which are estimated to account for 37 per cent of the banking sector, are under "profit pressure" to boost their business aggressively as one of the ways to reduce the NPL level as well as grab market share, added Ryan Tsang, director of S&P's financial services ratings (Hong Kong).

He said that a fall in the country's economic growth may cause a deceleration in the trend of declining NPL ratios over the next six to 18 months. S&P forecast 7-8 per cent economic growth this year from 9.1 per cent in 2003.

Based on the official NPL ratio of 17.8 per cent and the estimated impaired asset ratio at 40 per cent, China's banking sector could take between six and 16 years to write down its impaired assets to the 2-3 per cent of total loans as in some developed banking systems, according to S&P's commentary "China's Banks Face Challenges from Economic Slowdown".

Meanwhile, Habir said the recent macro economic adjustment would not influence the listing plan of Bank of China and China Construction Bank which are now under financial and structural reform for initial public offerings. He expects the banks to list next year as scheduled.

As to whether there would be an interest hike, Habir said he expects the central bank would first strive to ask banks to hold bank loan growth and avoid raising interest rates as much as it could.

"It really depends on whether the economy would achieve a soft landing. If the economy slows down, which S&P expects so, I believe the central bank would keep the interest rate at the current level," Habir said.

(HK Edition 05/25/2004 page15)