The Chinese government's recapitalization plan for the big four state-owned commercial banks will not improve prospects for the lenders, who are expected to face rising competition, if a sustained reduction in bad loans is lacking.

China is studying a plan to inject up to 1 trillion yuan (US$120.5 billion) into the big-four banks in the near future to help them enlarge capital bases to meet the competition from overseas banks as the domestic financial market is opened up, said the Hong Kong and Shanghai Banking Corp in a report.

The plan seeks to double the big-four lenders' capital adequacy ratio to 8 percent from the present 4 percent in five years, said the report.

However, the HSBC China Monthly Report also said that the recapitalization plan, which is a complementary measure, may not be a long-term solution to solve the big-four banks' NPL problem unless fundamental changes are made. Some of the changes include strengthening the banks' management and to ensure further significant progress is made in the reform of state enterprises.

The state banks have been under pressure from the government to increase lending to small non-state businesses and to individuals for consumption uses, all new areas for them.

"Not surprisingly, inexperience and excessively rapid expansion have led to poor loan asset quality," said the report.

"Obviously, as most of the above are deep-seated problems mostly beyond the control of the banks them-selves, a significant reduction of NPL ratios will be difficult to attain in the short term."

Mounting NPLs resulted when the big-four banks started to lend, as a matter of policy, to state-owned enterprises in the 1990s. The People's Bank of China has asked the lenders to stop lending to SOEs and it is understood that they are reducing that role.

"The move will help them improve their assets quality," said Li Yong, vice finance minister.

The big-four banks, which dominate the domestic banking industry with a 60 to 70 percent share, carry an average NPL ratio of 21.3 percent at the end of September, down 4.83 percentage points from the beginning of this year, according to the China Banking Regulatory Commission.

The big-four lenders have to cut their NPL ratio to below 15 percent by 2007, the year China will fully open its banking market to overseas investors.

The central government injected, for the first time, 270 billion yuan into the big four lenders in 1998.

It transferred 1.4 trillion yuan worth of NPLs to four asset management companies one year later.

(Shanghai Daily November 4, 2003)