bankofchina.gifFollowing the success of the Bank of China's massive $9.7bn IPO, credit rating agency Fitch offers a timely warning that all is not what it seems in China's banking system.

problem of bad loans — more politely called non-performing loans —
is well known, but not the true extent because the definition of NPLs
varies and is politically charged.

For example, auditor Ernst & Young had to retract a report on the NPL problem that put Chinese banks' exposure at an astonishing $911bn.

Fitch believes it has the real figure — $220bn. While much less than Ernst & Young's guesstimate, Fitch says the figure is still worrying.

figure is close to one-third larger than the stock of capital in the
entire banking system, underscoring the extent of asset quality
weaknesses that still remains.”

Fitch stresses
that the exposure to NPLs is highly concentrated at institutions that
have yet to be restructured, while the reformed banks are less exposed.
It also says the current state of affairs has much improved from just a
few years ago when unfunded losses exceeded total banking system equity
by several multiples.

As for the Bank of China, its balance sheet is relatively clean, but it has now has to prove it can keep it that way.

Foreign banks — and investors — should do their homework before getting out their cheque books.

global banks like HSBC, Bank of America and Deutsche Bank, have been
busy doing just that. They have acquired minority stakes in big
domestic banks in anticipation of the opening of China's domestic
banking market, which is supposed to happen at the end of 2006 under
the terms of China's accession to the WTO.

GTnews, a specialist title for treasury managers, has published
a a good description of the NPL problem and what China has done to
address it, as well as a background on China's banking market and the
challenges foreign banks face.