Non-Performing Loans In China:Is There A NPL Problem That Is Getting Bigger?

This thesis discusses and analyse the issue non-performing loans in China. The current situation regarding NPLs in China is analysed. The NPLs situation in China has improved drastically over the years. The ratio stood at1percent in June2011according to Asian Development Bank.1By analysing the official statistics mostly over the last10years period, it is shown that the banking sector of China shows much improvement in terms of the fundamentals. The quality of assets has improved significantly. The analysis of the fundamental indicators as well as other factors it appears that large banks in China are financially healthy and can survive significant increase of NPLs. It is found that a new increase of NPLs is expected during the next two to three years. While the banking sector does not appear to be in any immediate danger, it remains critical to be watchful on the Chinese financial sector in the years ahead. The conducted analysis of the financial situation reveals only a partial viewpoint and does not provide a complete view of the NPL issue, warnings and outcomes ahead. The NPL ratio might reach as high as5percent due to a slowing economy, re-valuations in local property markets and local governments facing difficulties in refinancing their debts. A significant effect to the banking system in the next one or two years is however not foreseen. In view of the NPL issue in China, challenges still exist in the prevention and resolution of NPLs. Attention should still be given to these factors. In the prevention of new NPLs, it remains imperative that banks should maintain a lending culture that is based on commercial lending. It remains vital for banks to train managers to be able to make just assessments of risks. Accountability and responsibility in lending practices should be promoted. Political influence should also be reduced in order for banks to avoid NPLs. In addition to reduce credit risks, a universal classification and definition criteria for usage by all banks should be promoted.