Chinese banks could face higher bad loan ratios this year amid credit tightening, a research report said yesterday.
China's tightening monetary policies could weaken the dilution of bad loans as the country slows the growth of loans and sees special-mention loans deteriorating to non-performing loans for marginal borrowers, said Ryan Tsang, the senior director for financial institution ratings with Standard & Poor's.
The economic freedom that Chinese banks have enjoyed for the past six years will be lessened by the tight loan growth quotas, said Tsang.
With the tighter monetary policies, companies will find it more difficult to obtain finance and this might interfere with their expansion and possibly lead to a deterioration of their assets.
Banks are under the central bank's "window guidance" tighter lending quota as part of the country's tight monetary policy.
China said in December it had moved its "moderate" monetary policy to "tight" in 2008 to fight inflation.
The consumer price index, the main gauge of inflation, rose 7.1 percent in January, the fastest growth in more than 11 years.
"Lending in China has ballooned in recent years, ratcheting up credit risks," said Liao Qiang, a Standard & Poor's credit analyst. "In a still remote scenario, a large scale deterioration in loan quality could hurt ratings."
A large scale reform of the Agricultural Bank of China could bring down the bad loan ratio but excluding the ABC effect, the NPL is under some pressure, said Tsang.
ABC is the last of the state-owned banks to be reformed. The bank's bad loan ratio is reported to have increased from 23.55 percent in 2006 to 23.64 percent at the end of 2007.
Deputy Finance Minister Li Yong was reported earlier as saying that one third of the China Investment Corp's US$200 billion start-up capital, or US$66 billion, will be injected into China Development Bank and Agricultural Bank for their restructure.
The average bad loan ratio at banks in China dropped from 7.09 percent to 6.17 percent last year, said the China Banking Regulatory Commission.
China is revamping its state-owned banks through bail-outs and helping them shed bad loans.
Industrial & Commercial Bank of China, Bank of China and China Construction Bank have received US$60 billion.
"Domestic credit risks outweigh subprime woes for Chinese banks," Standard & Poor's report said.