Beijing, October 23:

China’s central bank has warned that bad loans in the banking system remain a “huge and difficult” challenge even as the nation’s largest lender completes a world record share sale.

“The foundation for sound asset quality still isn’t solid,” central bank deputy governor Wu Xiaoling told a financial conference in Beijing, according to the sina.com website on Monday. “The task of avoiding a rebound in non-performing loans is still huge and difficult,” she was quoted as saying at the conference Sunday.

Wu made the remarks a day before the Industrial and Commercial Bank of China (ICBC) announced the pricing of its much-anticipated initial public offering, setting the stage for what is likely to be a$ 22 billion bonanza. Japanese mobile phone operator NTT DoCoMo’s 1998 float held the previous record at $18.4 billion.

Wu noted that China’s state banks still rely heavily on net interest margins — the difference between what a bank earns in interest on loans and what it must pay on deposits — and said lenders remain vulnerable to any change in the economic weather. “Any changes in macroeconomic conditions will directly impact bank asset quality and therefore impact the profitability and stability of the banks,” she said. China’s banks are less than ideally positioned to respond to such challenges, according to the central banker.

“China’s state-owned commercial banks lack high-quality talent, even as they are over-staffed and suffer from low-efficiency allocation of their personnel,” she said.

The non-performing loan ratio of China’s banks dropped to 7.5 per cent at the end of June, down 1.1 percentage points from the end of last year, according to previously released data from the banking regulator.

Analysts acknowledge that lending practices have generally improved over the past several years but also warn that the decline is really due to government bailouts and aggressive lending in the current liquidity-fuelled boom. Since bad debt is calculated as a percentage of assets, an increase in bank lending can reduce the proportional level of sour loans.

The 7.5 per cent level cited by the regulator would be considered almost a crisis in a developed market economy but represents a huge improvement in China where foreign analysts estimated up to 40 per cent of all bank loans had gone bad before the current round of reforms.