China banks borrow Western tricks to combat spike in bad loans

Chinese banks are increasingly drawing on Western ways of selling off bad loans, after four of the largest five lenders reported a spike in defaults in an economy stuttering at its slowest growth rate in 25 years.

The lenders - bellwethers of the world's second-largest economy - plan to expand the practice of selling bad loans bundled into financial products, to reduce the amount of unpaid debt on their books, according to banking insiders.

The practice, though common in the West, was mostly unheard of in China just a year ago. Its uptake reflects government policy of relaxing restrictions on financial markets to attract investment, as well as banks' hunger for ways to deal with a worsening bad loan situation as profit growth flags.

But analysts say the practice masks the true extent of a situation exacerbated by so-called zombie loans neither in default or written off, languishing with cash-strapped local authorities. Central bank encouragement to increase lending and support the economy could only compound matters, they say.

Banks generally reported bad loan ratios - or the percentage of total lending which has soured - of 1 percent to 1.5 percent. "I think the real level is around 2 to 3 percent," said Jiahe Chen, chief strategist at Cinda Securities in Shanghai.

Hong Kong-based Leon Goldfeld, investment director at Amundi Asset Management, estimated the true bad debt ratio would reach 9 percent if economic growth slowed to 6 percent, rather than the government's target of around 7 percent.

Industrial and Commercial Bank of China Ltd (ICBC) , Agricultural Bank of China Ltd (AgBank) , Bank of China Ltd (BoC) and Bank of Communications Co Ltd (BoCom) this week each booked marginal profit growth or contraction for the fourth quarter, with China Construction Bank Corp reporting on Friday.