Chinese lenders face high risk of rising bad loans

China's commercial banks are facing a high risk of increased bad loans, partly because of a lending spree to support massive economic stimulus three years ago.

That risk might worsen as local governments have attempted to unleash a new round of stimulus packages amid the current economic downturn, market analysts have warned.

Seven of the 16 Chinese listed banks reported a rise in their non-performing loan ratios in the first half of 2012, according to their interim reports.

Though many kept the ratio below 1 percent, bad loans in some particular sectors and regions were more significant.

China Everbright Bank, for example, said the NPL ratio for its loans extended to small and medium-sized enterprises hit 1.63 percent.

Loans extended to businesses in Wenzhou, a city in Zhejiang Province known for its entrepreneurship, turned sour most notably for Ping An Bank and the Bank of Communications. About 27.6 percent of Ping An's outstanding bad loans originated from Wenzhou, according to the bank's interim report.

Qian Wenhui, vice president of BoCom, said 90 percent of the bank's 887 million yuan new default loans in the first half of this year were from Wenzhou.

Since late last year, Wenzhou has been embroiled in a debt crisis caused by unregulated private lending that boomed with stimulus following the 2008-2009 global financial crisis. As weakened overseas demand continued to dampen demand for exports, many of Wenzhou's SMEs went bust, with their loans from banks or private creditors invalidated.

Market analysts said that while Wenzhou is an extreme case, the credit surge to support the country's stimulus measures did spawn risks for the banks.

"Past experience has taught us that a bad loan crisis usually came three years after a period of abnormal credit surge," said Wei Guoxiong, chief risk management official with the Industrial and Commercial Bank of China. "There will be a notable rise in bad loans in the banking sector this year."

According to the interim reports, Shanghai Pudong Development Bank, China Minsheng Banking Corp and China Everbright Bank saw overdue loans grow by 81.6 percent, 63.2 percent, and 62 percent in the first half, respectively.

Some analysts believe the sluggish real economy will erode the huge profits made by China's banks, once called the most lucrative sector in the world.