China will formally introduce an internationally accepted loan rating system on January 1, the central bank announced on Monday.

The system, which will require all banks to categorize their loans according to the repayment ability of the borrowers, will enhance the banks' risk management and help present a clearer picture of the banks' asset quality.

A spokesman for the People's Bank of China, also known as the central bank, said it is working on a regulation for the banks' disclosure of loan ratings.

"The new rating system will enable banks to better monitor the repayment ability of the borrowers, recognize potential risks so they can take timely measures to curb losses and improve asset quality," the spokesman said.

The introduction of the new system also represents the country's efforts to accept international norms following its accession to the World Trade Organization (WTO) earlier this month.

The new rating system, which was first used by US bank regulators, is now recognized by most countries and international financial organizations.

Chinese banks have been using a different loan rating system since the 1980s, when the commercial bank system was restored to meet the needs of an emerging market economy.

The old system basically based the ratings on whether loans became overdue or how long they had been overdue.

That system was seen merely as a tool for keeping accounts of the loans. Although the banks need to know the whereabouts of their money, they did not really care about the risks during the entire 1980s because the government, which was the sole shareholder of all banks at that time, saw the banks as investment arms.

The government's attitude changed in the mid-1990s, and the banks have been made market-orientated companies.

Huge losses by some banks during that period made the government improve the banks' risk management. Officials also began to understand that the old rating system was not useful in this regard.

China's expanding links with foreign countries also triggered the interest of foreign firms and economists about the health of Chinese banks.

But China's unique loan rating system made it impossible for foreigners to assess the banks' asset quality.

Various estimates emerged. Some put the major four state banks' non-performing loan rate as high as 50 percent, though Chinese economic officials said they believed the non-performing loans accounted for about 25 percent of the total.

The central bank began to experiment with the new system in 1994 and gradually spread the experiments to an increasing number of banks.

"We believe it is time now to spread the new system to all banks," the spokesman said.

(China Daily December 25, 2001)