Bad loans fall, systematic risk rises for Chinese banks

Thanks to the improvement of risk management and internal efficiency, Chinese banks have reduced their bad loans in the last two years. However, they are still keeping highly alert against systematic risks looming in local government bonds and the property market.

Bad loans in China's banking sector shrank to 1.6 percent by the end of 2009 from 2.4 percent by the end of 2008. Bad loans of listed banks were all kept well below 1.3 percent at the end of the third quarter of 2010, except the Agricultural Bank of China, which was the last one to go public and reported 2.1 percent bad loans.

In the mean time, the provision-coverage ratio of China’s banking sector, an indicator of banks' capability to deal with non-performing loans, rose from 116 percent in 2008 to 155 percent by the end of 2009. By the end of the third quarter of 2010, the average provision-coverage ratio of the 16 listed Chinese banks reached 232 percent.

Banks began to pay more attention to guarding against systematic risks when the government adopted a relaxed monetary policy to maintain economic growth through the global financial crisis. The risks from the booming property market and the swelling local government bonds are increasingly in particular.

Several pressure tests have been conducted for banks. Although the results have shown that risks remained "controllable," commercial banks are still on high alert and have strengthened their supervision on capital flow and credit concentration in certain areas and clients.

Liu Mingkang, chairman of the China Banking Regulatory Commission, said on Wednesday that a 2 percent bad loan limit is tolerable and reasonable for Chinese banks.


By Li Jia, People’s Daily Online