China's commercial banks are facing a high risk of increased bad loans as local governments try to unleash a new round of stimulus packages.
Seven out of the 16 Chinese listed banks have already reported a rise in their Non-Performing Loan ratios in the first half of 2012, according to their interim reports.
These were attributed partly due to a lending spree to support massive economic stimulus three years ago.
Loans extended to businesses in Wenzhou, a city in east China known for its entrepreneurship, went bad most notably for Ping An Bank and 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 Bank of Communications, said 90 percent of the bank's 887 million yuan new default loans in the first half of this year were from Wenzhou.
As weakened overseas demand continued to dampen demand for exports, many of Wenzhou's small and medium-sized businesses went bust, their loans to banks or private creditors invalidated.
But the credit surge to support the country's counter-crisis 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, Minsheng Bank, and China Everbright Bank saw overdue loans grew by 81.6 percent, 63.2 percent, and 62 percent in the first half, respectively.
Many are more worried about the impact on banks of local governments' latest efforts to stimulate the economy.
China's local governments usually rely on bank lending to finance development projects.
In July, Changsha, capital city of central Hunan Province, unveiled its ambitious investment plan, which features a total investment of 829.2 billion yuan in 195 projects ranging from constructing an airport and exhibition halls to renovating run-down towns.
Wuhan, capital of Hubei Province, announced 82 transport projects that involve 230 billion yuan investment.
Southwest Guizhou Province, China's poorest province, said in a tourism development draft that it might need 3 trillion yuan for its 2,382 suggested tourism projects.
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