The country's banking sector, if acting alone, will need at least 10 years and possibly as many as 20 years to reduce its average non-performing loans ratio to a healthy 5 percent level, the ratings service company said.

The cost of necessary write-offs could be equivalent to more than US$500 billion, or more than 40 percent of China's gross domestic product of US$1.3 trillion for 2002, said Terry Chan, an analyst with the company.

"Unless the government permits the big-four banks to make a second round of bad loan sales to asset management companies or takes other steps to enable the banks to reduce their NPLs, the People's Bank of China's goal of halving banks' NPLs in four years from 2001 will be difficult," said Chan.

S&P estimated that the four top commercial banks, namely Industrial & Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China, have an average NPL ratio of more than 30 percent.

ICBC, BOC and CCB, the three largest in terms of assets, recently disclosed their respective NPL under the five-grade loan classification system.

ICBC's NPL were equivalent to 25.7 percent of its loan book at the end of last year, while BOC's stood at 22.4 percent. CCB stood at 15.4 percent.

China's four asset management companies set up by the Ministry of Finance, have purchased NPLs worth about 1.4 trillion yuan (US$168.68 billion) in 1999 from the big-four state-owned commercial banks.

"Nevertheless, the rate of recoveries on the NPLs purchased by the AMCs has not been satisfying. That casts a shadow on their future performance," S&P said.

China's AMCs have successfully disposed of about 30 percent of the bad loans they bought from the banks, according to insiders.

NPLs are not the only thing to worry about, S&P said. New loans approved in 2001 and 2002 have yet to indicate how they are doing. It is difficult to find out whether a loan fails to perform until several years have elapsed since disbursement.

"The speed of the NPL reduction desired by the country's authorities will not be realistic without some form of government intervention. Possible bail out methods include fresh capital injection and further NPL transfers to AMCs," said Chan.

CCB, BOC and ICBC have indicated they want to go public by 2006 to raise funds to reduce bad loans.

(Shanghai Daily June 24, 2003)