China's central bank yesterday said a report by Ernst & Young LLP that claimed the nation's bad-loan ratio was almost six times higher than disclosed was "ridiculous."

The report "distorted" the real asset quality of the nation's banking industry and "severely contradicted" Ernst & Young's own auditing results of many Chinese financial institutions, the People's Bank of China said in a statement on its website.

China's total bad loans amount to US$911 billion, the most in the world, Ernst & Young said in the May 3 report. That compared with the figure of 1.31 trillion yuan (US$164 billion) reported by the China Banking Regulatory Commission as of March 31.

Chinese lenders have been offloading bad loans and boosting capital in preparation for overseas share sales, part of government plans to prepare the industry for increased foreign competition starting at the end of this year.

Bank of China, the nation's oldest lender, plans to raise as much as US$9.9 billion in the world's largest initial public offering in six years.

Non-performing loans accounted for 8 percent of Chinese banks' total advances as of March 31, down from 28 percent in 2003 after the nation spent US$60 billion to bail out Industrial and Commercial Bank of China, Bank of China and China Construction Bank in the past three years, and transferred more than 2.6 trillion yuan (US$325 billion) of bad loans to four state-owned asset managers.

China's four biggest state-owned banks, accounting for over half of the nation's US$4.7 trillion banking assets, had a combined 1.1 trillion yuan (US$137 billion) of bad loans, or 9.8 percent of total lending, by the end of March, according to the China Banking Regulatory Commission.

Ernst & Young estimated the amount to be US$358 billion as banks have branded some loans as "special mention" and failed to classify US$225 billion of them as non-performing.

Chinese banks classify loans in five categories, depending on how overdue payments are and the prospect of being repaid.

(China Daily May 12, 2006)