(South China Morning Post)
Updated: 2007-08-02 15:40

Loose credit policies are threatening a fresh spate of bad loans, the mainland central bank warned in a report aimed at regional governments and local lenders.

Excessive leveraged investment in fixed assets and a high concentration of long-term loans have increased the chances of loans turning sour, according to the China Regional Financial Stability Report, released by the Shanghai office of the People's Bank of China.

"Banks' credit concentration is quite high, the structural problem of a high proportion of medium- and long-term loans shows no sign of abating and there is growing pressure of a rebound in non-performing loans," the China Business News quoted the report as saying.

The renewed warning on bad loans chimes in with recent government calls to cool over-investment and tighten credit policy amid fears that excessive liquidity is leading to overheating.

"Right now non-performing loans are not a problem, but because the central government wants to tighten the economy, the central bank has to sound a cautionary note," said Dorris Chen, banking analyst at BNP Paribas.

China Banking Regulatory Commission chairman Liu Mingkang recently said that the ratio of bad loans to total assets in the banking system had fallen through 9 per cent for the first time and might be as low as 5 per cent next year.

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The percentage of non-performing assets in the major commercial banks was as high as 23 per cent just five years ago, Mr Liu said.

"The mainland economy is currently quite strong and there is not much worrisome evidence of an increasing number of loans turning bad. The worry for banks remains, what happens if there is a strong economic downturn?" said Fitch Ratings analyst Charlene Chu.

Fitch estimates that three of the big four State-owned banks - Industrial and Commercial Bank of China, Bank of China and China Construction Bank - and Bank of Communications had a bad loan ratio of 3.5 per cent last year, while joint-stock banks recorded an even healthier 2.4 per cent.

City commercial lenders were the major obstacle to the whole banking system reform, said Ms Chen. "City commercial banks are directly controlled by local governments, so they often do not make independent decisions about whether to fund local projects," Ms Chen noted. "This causes big economic and management problems at the same time."

Beijing is targeting local governments, which typically view investment as the key means to high economic growth, in its latest bid to slow down the economy and promote more efficient investment.