China has started reforming state-owned banks by reducing the accumulating Non Performing Assets (NPAs). A vast pool of reserves is being utilized to clean up bad debts in the wake of the entry of foreign banks into the country.

China's economic growth has been boosted by growing investments in government and private projects funded by state-owned banks since the last 20 years. However, these investments have created high levels of the Non Performing Assets (NPAs) in banks. The decision to recapitalize banks has initiated the discussion for a reforms process in the banking system, which is far behind in the reforms process compared with the other Asian countries banking systems. The government is pumping $45 bn for recapitalization of four state-owned banks: Bank of China, Agricultural Bank of China, China Construction Bank and Industrial & Commercial Bank of China. This decision was taken in view of the forthcoming IPOs to be issued by Chinese banks. These efforts by the government are expected to boost capital adequacy ratios and reduce NPAs of the total credit. One of the major reasons for the government intervention was to prepare Chinese banks to compete with the foreign ones by 2007 as committed in the WTO norms.

Banks are a major source of funds for both government and private projects in China, because of the undeveloped capital markets. Accordingly, banks have extended loans under government direction to unprofitable state-owned enterprises, without worrying about the repayments and risk assessment. NPAs constitute around 30% of bank assets according to official figures, but realistic estimations can go up to 40%. The total bad debts amounted to $420 bn last year. Ashima Goyal, Professor, Indira Gandhi Institute of Development and Research (IGIDR) says that estimates of aggregate NPAs to GDP vary from 20-45%. This level is not sustainable, but will not lead to a crisis if measures are taken to reduce it.

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