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China Construction Bank (CCB), one of the country's big four State-owned commercial banks, announced on Monday, Jan. 12, 2004, that it earned 51.2 billion yuan (US$6.2 billion) in profit last year before setting aside provisions for bad loans.

The bank's profit increased 13 billion yuan (US$1.6 billion), or 33.9 per cent, compared with the previous year, a bank spokesperson said.

The bank also wrote off 88.4 billion yuan (US$10.7 billion) worth of bad assets last year, up 58.3 billion yuan (US$7 billion) from 2002.

Analysts said the announcement was more good news for the bank, which plans to list ahead of China's three other major banks.

The three other big four banks are the Bank of China, the Industrial and Commercial Bank of China and the Agricultural Bank of China.

CCB officials announced last week the government had injected US$22.5 billion to increase the bank's capital adequacy.

"China's big four banks will have to sharpen their competitive edge before foreign banks enter China, without restrictions, at the end of 2005," said Niu Li, a senior economist with the State Information Centre.

The banks will have to lower their non-performing-loan ratios (NPLs), overcome historic financial burdens and raise their capital adequacy to international standards, Niu said.

China's commercial bank law stipulates commercial banks' capital adequacy ratios must

reach 8 per cent, the minimum required by the Basel Capital Accord reached by international banking managers.

This means China's commercial banks, especially the big four banks, will have to achieve the goal before they list, said Dong Chen, a senior analyst with China Securities.

"Reducing bad loans is the first step the bank must take to list," Dong said.

Chinese banks usually use bad loans reserves to write off NPLs.

Besides bad loan reserves, a capital injection from the central government is another way to write off NPLs, Dong said.

CCB has also explored new ways to deal with the bad assets, Yang Xiaoyang, head of the bank's asset preservation department, told China Daily.

The bank held several auctions last year to sell off bad assets.

Some mortgaged assets -- including cars and real estate -- were sold to domestic and foreign investors through the auctions, Yang said.

The bank also developed an information management system to auction mortgaged assets online.

"We also tried to handle the bad assets by working with foreign investment banks," Yang said.

CCB last year signed an agreement with Morgan Stanley, a US-based investment bank, to resolve bad assets worth about 4 billion yuan (US$482 million), he said.

"But the deal has yet to be approved by relevant government departments, including the People's Bank of China," he said.

CCB, which handed off 250 billion yuan (US$30.1 billion) worth of NPLs to China Cinda Asset Management Corp in 1999, had 267.8 billion yuan (US$32.3 billion) worth of NPLs at the end of 2002.

At that time, the bank's NPLs stood at 15.36 per cent by international standard.

The bank tried to dispose of 55 billion yuan (US$6.6 billion) worth of bad loans and to reduce the NPL ratio by 4 percentage points in 2003, Yang said.

By the end of last September, the bank's NPLs was 11.92 per cent by international standard.

"Aiming to become more competitive, Chinese commercial banks will have to step up business supervision and risk control measures," said Yiping Huang, a senior economist with Citigroup.

Also, they must speed up establishment of corporate governance, he said.

CCB President Zhang Enzhao said the bank, with Wuhan University in Central China's Hubei Province, developed a new internal control system to minimize financial risks.

"We will speed up internal reform and beef up internal management," he said.

CCB will speed up efforts to establish a modern financial company, that will be a model for comprehensive reform of State-owned commercial banks, he added.

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