While risks in the Chinese banking sector are high, its outlook remains stable as the industry regulator and banks are stepping up joint efforts to clear non-performing loans, said Standard & Poor's Ratings Services yesterday.

"The outlook on the Chinese mainland banking system remains stable rather than positive as continued strong economic growth is counterbalanced by the structural problems faced by the banking sector," said Ian Thompson, a Standard & Poor's analyst.

S&P revised last week its estimate of the ratio of impaired assets to total loans in the Chinese banking system to 44 to 45 percent at the end of 2003 from almost 50 percent.

The figure is a sharp contrast to the Chinese government's calculation, however.

The China Banking Regulatory Commission said that the non-performing loan ratio in the domestic financial institutions stood at 19.6 percent at the end of June, down 3.51 percentage points from the beginning of this year.

"The revision was made because of strong loan growth in the financial system and efforts by the country's banks to write off their impaired assets," said S&P in a statement, adding that "Despite the revision, the ratio still remains one of the highest in the world."

Financial institutions on China's mainland extended loans worth 1.89 trillion yuan (US$227.71 billion) in the first seven months of this year, compared with 1.85 trillion yuan in the whole of 2002, said the People's Bank of China.

"However, given the brisk rate of loan growth over the past five years, the latent cre-dit risk from loans extended in recent years could be high," said Thompson.

S&P also listed in its "Asia-Pacific Banking Outlook 2004" publication, which was released yesterday, some negative factors in the Chinese banking industry, including a high level of problem assets, insufficient capital and inadequate loan loss provision.

Meanwhile, S&P said the impaired asset ratio will continue to decrease as a result of a fast growing economy, improving awareness and government support.

The Chinese central bank has asked the nation's big four banks to cut their NPL ratio by two to three percentage points annually and reduce the proportion to 15 percent by 2006.

The NPL ratio in the big four state-owned commercial banks stood at 22.19 percent by the end of June, down 4.02 percentage points from the beginning of this year, according to the CBRC.

Separately, the CBRC said yesterday the NPL ratio in the nation's 11 joint-stock commercial banks stood at 9.34 percent by the end of June, down 4.46 percentage points from a year earlier.

The NPL ratio in the 112 city commercial lenders fell 7.18 percentage points to 15.88 percent by the end of June from a year earlier.

(Shanghai Daily September 9, 2003)