Non-performing loans becoming a nightmare for China

The government hedges against a potentially disastrous rise in non-performing loans.

The government is requiring Chinese financial institutions to keep 1.5% of their gross loans as general provisions beginning this July up from the existing 1% in a move to tighten the banking sector's risk prevention and control.

The new "dynamic provision" regulation imposed by the Ministry of Finance will apply to policy banks, commercial banks, financial companies, urban and rural credit cooperatives and lease financing companies.

Financial asset management firms and smaller town- and village-based banks will also be subject to the new regulation. They were previously exempted under the existing rules.

MOF said the new rules aim to boost the banking sector's ability to guard against risks and make financial enterprises' reserves for loan losses more predictable.

It also raised the weighting of sub-prime loans from 25% to 30% while setting the weighting for suspicious loans at 60% and losses at 100% in calculating potential risky asset value.

China's banking sector reported a combined net profit of US$164.9 billion in 2011, 16% more than in 2010, according to the China Banking Regulatory Commission.

The new rules come in the wake of public criticism of the huge profits by Chinese banks despite a slowdown in the country's economy. It will also reduce bank’s profits as well as the fiscal revenues and dividends allocated to the state for state-owned stakes in those companies.