Significant write-offs and a bigger loan base combined to help slash China's bad-loan ratio by five percentage points in the final six months of last year, according Standard & Poor's.
However, the ratings agency has warned that an economic slowdown could create a new stockpile of problem loans.
China's impaired asset ratio fell to 40 per cent of its total banking sector at the end of last year, down from 45 per cent in the middle of last year, S&P said.
'Our impaired asset estimate takes into consideration the banking sector's 6.6 per cent loan growth in late 2003, and the continued efforts by banks to write down and recover non-performing loans (NPLs),' S&P financial services ratings director Ryan Tsang said.
S&P said that falling economic growth might cause a deceleration in the trend of the declining NPL ratio over the next six to 18 months.
'We expect the economy to slow down to around 7 and 8 per cent, compared to the 9 per cent that it did last year. And in this soft-landing scenario, we expect the banking sector to find it harder to reduce the NPLs further, and the non-performing asset level to hover around 45 per cent,' said Manggi Habir, director of financial services ratings.
