Bad loan risk looms large over Chinese banking sector

BEIJING: China's state-run banks are facing increased bad loans partly due to a lending spree to support massive economic stimulus three years ago, the official media said, highlighting for the first time concerns about economic slowdown following a fall in exports.

That risk might worsen as local governments have attempted to unleash a new round of stimulus packages amid the current economic downturn, market analysts have said.

The concerns rose as seven out of the 16 Chinese listed banks reported a rise in their Non-Performing Loan (NPL) ratios in the first half of 2012, according to their interim reports.

Though many managed to keep the ratio below one per cent, bad loans in some particular sectors and regions were more significant.

According to the interim reports, Shanghai Pudong Development Bank, Minsheng Bank, and China Everbright Bank saw overdue loans grew by 81.6 per cent, 63.2 per cent, and 62 per cent in the first half, respectively.

Some analysts believe that the sluggish economy will erode the huge profits made by China's banks, once called the most lucrative sector in the world. The 16 listed banks still earned a profit of 545 billion yuan ($ 86 billion) in the first half, nearly half of the net profits made by China's listed companies combined, the reports show.

Loans extended to businesses in Wenzhou, a city in east China known for its entrepreneurship, went bad most notably for Ping An Bank and Bank of Communications, the Xinhua report said.

Qian Wenhui, vice president of Bank of Communications, said 90 per cent of the bank's 887 million yuan ($ 140 million) new default loans in the first half of this year were from Wenzhou.

Since late last year, Wenzhou had been embroiled in a debt crisis caused by unregulated private lending that boomed with stimulus following the 2008-2009 global financial crisis.

As weakened overseas demand continued to dampen demand for exports, many of Wenzhou's small and medium-sized businesses went bust, their loans to banks or private creditors invalidated.