Chinese banks have made major progress in their campaigns to reduce non-performing assets in the first half of this year, the China Banking Regulatory Commission (CBRC) said Tuesday.

But the commission warned about fresh difficulties in such efforts, indicating that new bad loans will likely emerge from fixed asset projects that have been suspended or cancelled because of the state's recent measures to cool down frenzied fixed investment growth.

Non-performing loans (NPLs) at China's major banks - the four state-owned commercial banks and the 11 joint-stock banks - dropped by 4.44 percentage points from the end of last year to 1.66 trillion yuan (US$200 billion), or 13.32 percent of their total lendings, at the end of June.

The four state-owned lenders held 1.52 trillion yuan (US$183 billion) of the total, or 15.59 percent of their loan portfolios, the CBRC said. The four banks are the Industrial and Commercial Bank of China, the Bank of China (BOC), the China Construction Bank (CCB) and the Agricultural Bank of China.

The commission said the major reason for the fast decline of NPLs was massive disposals at the BOC, the CCB and the Bank of Communications, one of the joint-stock lenders that is undergoing a major restructuring.

The BOC and CCB, which were chosen at the end of last year by the Chinese Government for a pilot joint-stock reform and received a combined US$45 billion recapitalization, sold nearly 280 billion yuan (US$33.7 billion) in NPLs to a state-owned asset management company in June.

Despite the massive NPL disposals, the CBRC said its task of reducing both outstanding NPLs and the NPL ratios at major banks this year has got more difficult as the "loans to some suspended or cancelled projects will create a new batch of bad loans."

The government has ordered tight credit curbs and land controls this year on overheated sectors such as steel, cement and aluminium, trying to slow down the rapid growth in fixed investment and bank loans starting from the latter half of last year.

A big number of steel and cement plants as well as many other fixed asset projects like economic development zones and shopping malls have reportedly been ordered to stop construction.

Analysts have expressed worries such administrative measures will not solve the problem, although they have had some immediate effect on slowing down fixed investment and bank loans.

China's broad money supply, which is mainly driven by bank loans, rose by 16.2 percent in the first half of this year, down by 4.7 percentage points from a year earlier.

(China Daily July 28, 2004)