CBRC: China still faces bad-loan
(Agencies)
Updated: 2006-02-27 16:53

Chinese banks still face an enormous challenge to reduce non-performing loans despite progress in cleaning up their balance sheets, the chief banking regulator said on Monday.

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), said the country's banks needed to do much more work to match the best practices of their global peers.

"There is still a huge gap between the internal control systems of Chinese banks and international banks. There's a long way to go to reach international standards," Liu told an investment conference.

With China now on the path to a market-based economy, a failure to improve risk management was the greatest threat facing the banking system, Liu said.

"The risk to banks is still not small, especially credit risk," he said.

Non-performing loans at China's banks fell to 8.9 percent of loans last year, from 13.21 percent at the end of 2004, partly because Industrial & Commercial Bank of China [ICBC.UL] transferred a big pool of sour loans to an asset management firm and used an infusion of state capital to write down other loans.

Capital injections and loan write-offs had strengthened the balance sheets of banks, but they faced the pressure of a rebound in non-performing loans, Liu said.

"China is in transitional period, where banks are facing great challenges and risks," he said.

"We cannot let down our guard."

China's banks are striving to raise their game as they prepare for full competition from foreign rivals at the end of the year under market-opening pledges Beijing gave when it joined the World Trade Organisation in 2001.

Further progress in banking reform is critical to an upgrade of China's credit rating, Standard & Poor's said last week.

Crucially, the state must loosen its grip on banks so that the profit motive, not political considerations, drive their lending decisions, the ratings agency said.

BIG RISKS

Liu acknowledged that central planning was to blame for a lot of the non-performing loans that had burdened the banks.

Authorities had identified more than 5,700 people responsible for the mountain of bad policy-directed loans, Liu said. Most of them had been forced out of their jobs in state-owned banks.

Although non-performing loans fell over the year as a whole, the ratio crept up in the fourth quarter of 2005.

Regulators and the central bank are especially worried about bad loans in industries suffering overcapacity, such as steel, aluminium and autos, if there is a resurgence in investment in those sectors.

Liu also said diversification by banks into brokerage and insurance made supervising the sector increasingly complex.

Domestic banks and insurers are currently barred from tapping into each others' businesses, but insurance regulators recently said banks would be allowed to enter the insurance sector.

"The complete supervision of groups' consolidated activities is still difficult," Liu said.

Bank of China [BOC.UL] and China Construction Bank Corp. two of the mainland's "Big Four" state lenders, are seeking approval to enter the insurance business, a senior insurance regulator said late last year.