Signs emerged last week that China's new banking commission is stepping up the campaign to clean up the important sector.

As commercial banks seem to be reducing the amount of non-performing loans (NPLs), the powerful China Banking Regulatory Commission (CBRC) is concentrating on what some economists consider to be an even trickier problem for the banking sector - bad non-credit assets.

It is planning an inspection in the near future of the non-credit assets of the four State-owned commercial banks - the Industrial and Commercial Bank of China (ICBC), the Bank of China, the China Construction Bank and the Agricultural Bank of China - in order to achieve a "comprehensive understanding" of their overall levels of bad assets. Inspections of other banks' non-credit assets will follow.

"Since 2000, there has been a fairly big improvement in the quality of credit assets at wholly State-owned commercial banks," the CBRC said in a statement issued on Tuesday.

But "at the same time," the problems of non-credit asset risks at those banks "are starting to surface," it said.

"That is a very good move, as it broadens the regulatory focus from mere non-performing loans," said Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences (CASS).

Yuan said the risks involving non-loan assets should have been tackled earlier, but have been neglected in the government's drive in recent years to reduce bad bank assets, which, in many cases, were tackled in the same way as bad loans.

He said "there are, really, many problems" with non-loan bank assets.

Bankers say they do not see why the problem is starting to surface other than that there is relatively little known about such assets except for problem loans, as most of the bad non-credit assets went sour in the 1980s and 1990s.

"As the five-category classification (of loans) was enforced and supervision tightened, the transparency and verity (about NPLs) have improved greatly and the risk level has dipped," a Chinese banker said.

"But comparatively, our understanding of non-credit assets is far less complete," he said. "I think that's the perspective of the commission."

Non-credit assets with the State-owned commercial banks largely include interbank lendings, securities holdings, industrial investments, prepayments on behalf of other institutions and assets they took over from other financial institutions under government orders, banks said.

Not even preliminary numbers are openly available as to how much non-credit assets at the four Chinese banks were lost, with the CBRC still urging self-inspection by those banks. Their NPL ratio was 24.13 per cent at the end of March.

The size of the problem is hardly comparable to the NPLs that stand in the trillions of yuan, but one senior official with one of the four banks said: "(It is) definitely not a small number."

But what makes the problem even more difficult to solve than bad loans, or why it has not been tackled for many years, is not the size.

"Many such problem loans have a long history, some dating back to the non-commercial bank era," said the official, referring to the years before 1994 when the policy-orientated functions were separated from the four banks to pave the way for their commercialization.

"The causes were more complicated (than those for bad loans), and many occurred due to the specific historical circumstances," said the official, who declined to be named.

"So it is very difficult to recover them," he said. "The procedures, unlike those governing loans, back then were very incomplete. And many people involved have changed positions many times."

In the early 1990s, when the central bank allowed cross-provincial interbank lending, many banks in the less developed western provinces lent heavily to their counterparts in the coastal areas in pursuit of high returns.

"The scale was massive, easily exceeding tens of billions," said Yuan of the CASS.

The government banned the practice in 1993 as risks heightened and some such lendings, if not all, were paid back under administrative orders. "There was one month when I remember as much as 30 billion yuan (US$3.6 billion) was retracted," Yuan said.

An insider said: "The lending procedures then were simple. And money went out through the hands of just a few guys."

Many assets also went sour in the 1980s as banks were allowed to establish non-bank businesses.

"They did whatever that was considered profitable, especially in Guangdong. Hence large numbers of trust companies were set up," Yuan said.

Again, as consequential financial risks came to a head in the late 1980s, banks were ordered to stop such investments and disconnect from businesses they set up.

Bankers say bad non-credit assets may also come from things like receivable interest payments that are overdue and shrinkages in the value of real estate assets when banks sell homes to their staff at a discount.

Banks, already grappling with the task of solving bad loans, say they are already taking on the issue. The ICBC, the largest of the four State-owned commercial banks, said it had strengthened monitoring of non-credit risk assets and already launched an inspection into its non-credit assets late last year, including reclassifying assets and combing through accounts.

"This year, we are going to move further by starting on a deal-by-deal approach," an ICBC official said.

The ultimate solution to the problem of bad non-credit assets, insiders say, would likely be banks writing them off with their own profits.

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