China's ongoing macro management has helped catalyze major improvements in the local banking industry, although lending risks have been amplified in certain areas, the nation's banking regulator said yesterday.

The average ratio of non-performing loans (NPLs) for major Chinese commercial banks, which include the four State-owned commercial banks and the 12 joint-stock commercial banks, dipped by 4.39 percentage points to 13.37 per cent at the end of September, it said.

Seven more Chinese banks have managed to bring their capital adequacy ratios (CAR) up to the 8 per cent regulatory requirement this year. Another six are expected to achieve the same goal by the end of the year, bringing the total of CAR-compliant banks to 21 and increasing their share in all banking assets to 44.8 per cent.

"It was an unprecedented and significant improvement in the Chinese banking industry that 21 banks could meet the requirement in such a short period of time, and that their share (of total assets) had grown from merely 0.56 per cent to nearly half of the total," Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), told a press conference.

Weak capital strength has long been a major problem hindering the development of the local banking industry. Only eight smaller Chinese lenders met the minimal 8 per cent CAR requirement at the end of last year.

The problem has been particularly worrying this year as the State stepped up tightening measures to cool down frenzied investment and loan growth, which many fear will create more bad loans weighing the banks' already weak balance sheets.

But banking authorities have made macro-management an opportunity to enforce the use of capital restraint among local banks as a way of managing their asset expansion.

The CBRC issued its first CAR rules in the middle of the year, requiring major commercial banks and the majority of city commercial banks to meet the minimal requirement by the end of 2006.

Liu said his commission has been urging commercial banks this year to categorize their loans accurately according to the internationally-accepted five-category loan classification system, set aside adequate bad loan provision, and calculate their CAR numbers.

"We were happy to see improvements fairly soon," he said, citing a significant 24 billion yuan (US$2.9 billion) increase in core capital of the 16 major commercial banks this year. "That was unprecedented," he said.

The major banks also issued a combined 73.7 billion yuan (US$8.8 billion) in subordinated bonds this year, the proceeds of which are calculated as non-core capital.

The aggregate CAR of the major banks increased by 2.23 percentage points from the end of last year.

"All the banks have started to learn to use capital restraint in containing their blind asset expansion," Liu said.

The banking industry will still manage to reduce its aggregate NPL level, in terms of both total amount and ratio, although lending risks have been accumulating in certain areas, the official said.

Local banks are facing increased lending risks from illegitimate projects such as university parks and urban renovation schemes as well as fixed investment projects that were cancelled during the macro-management, he said.

"But we need to thank macro management, or the development of such risks may bog down more bank loans," Liu said.

A number of fixed investment projects, many in overheated areas such as steel and cement, were halted by the government this year.

As the banks contained their lending to overheated sectors, they also stepped up support to key sectors such as coal, electricity, oil and transportation, with total credits to those sectors increasing by 13.6 per cent on a year-on-year basis in the first three quarters of the year, Liu said.

(China Daily)