China's NPLs reached a whopping US$79b at the end of 2012

Asset management companies will be set up to fend off risks.

The China Banking Regulatory Commission said Chinese banks have reported a fifth consecutive quarterly rise in the value of their bad loans. Outstanding non-performing loans or NPLs rose by US$10 billion to US$79 billion at the end of 2012 compared with three months earlier.

Mei Xingbao, an external supervisor for Bank of China Ltd and former president of China Orient Asset Management Corp, said the government's attempts to set up more asset management companies to dispose of lenders' bad assets could help fend off some risks.

The government is making efforts to separate NPLs at local level from national debt to prevent regional financial risks from spilling over into the national level.

He said China's new round of establishing asset management companies (AMCs) to deal with commercial lenders' bad assets will differ from 1999. Instead of selling their bad assets to the new AMCs, lenders, especially some rural banks that are less capable of digesting soured loans, will sell their shares at a much higher price to specific institutions to cover the loss.

Mei believes these lenders will usually leave AMCs to deal with bad assets instead of selling them to these companies.

China set up four big asset management companies in 1999 to remove an estimated US$225 billion in NPLs from the Big Four state-owned banks.
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