"Many long-term project loans issued by Chinese banks will mature between 2004 and 2005, a period during which the problems may emerge," Vincent Chan, head of China economics and strategy at investment bank UBS Warburg, said at the firm's third annual China conference in Shanghai yesterday.

He questions recent government claims that domestic banks now carry fewer bad loans on their books.

It may be true that the bad debt ratio for newly issued loans has fallen to between 2 and 3 percent, however, the quality of long-term loans issued in the late 1990s is open to question, Chan said.

The outstanding value of long-term loans for infrastructure projects held by domestic banks increased by 317.5 billion yuan (US$38.25 billion) last year, a much larger jump than the 89.6 billion yuan rise in 2001, according to the central bank.

Given the infrastructure and pro-perty construction boom only began around 1999, most of the projects won't be completed until between 2004 and 2005 when domestic lenders will truly understand the task in front of them, Chan added.

"Take loans to property developers for instance. Bubbles exist in the sector in some big cities, which could create potential bad loans," said an official with the Agricultural Bank of China. "The issue has already emerged."

The People's Bank of China has taken steps to reduce the amount of money lent to property developers and new home buyers since June 2001 as the government tries to squeeze out bubbles in the country's real estate market.

It is common now for government infrastructure projects in China to be half financed by bank loans and half by government bonds.

The big-four state-owned com-mercial banks on China's mainland, which carry an estimated NPL ratio of more than 20 percent at present, are under central bank orders to reduce their large NPL ratio by two to three percentage points annually.

The big-four banks were carrying a combined 1.8 trillion yuan in bad loans on their books at the end of 2001, said the central bank.

While analysts worry about more bad loans popping up, industry officials claim Chinese citizens have a growing level of confidence in the banking system.

That confidence is reflected in the rapid rise in the ratio of bank deposits to currency in circulation, which has more than doubled in the past de-cade, said the UBS Warburg official.

(Shanghai Daily January 21, 2003)