Chinese commercial banks saw their bad loan ratios drop by 1.1 percentage points in the first half of the year to 7.5 percent end June, the China Banking Regulatory Commission (CBRC) has announced.

Bad loans owed to Chinese banks totaled 1.28 trillion yuan (160 billion U.S. dollars) at the end of June, according to a report seen Tuesday on the regulator's website.

The bad loan ratio, or the ratio of bad loans to total lending, is a key measure of banks' financial health.

The report shows that China's state-owned banks had a bad loan ratio of 9.5 percent at June 30, much higher than listed banks' 3.1 percent or foreign banks' 0.9 percent.

China has been working hard to reform its banking system - previously dominated by large state-owned banks - to avoid risks spilling over from the banking sector and also to prepare its banks for competition from foreign banks in a more open market.

As part of the reform, state-owned banks have been transformed into banks with shareholding, including foreign stakeholders, and listed on the stock market. Billions of dollars have also been injected into the banks to improve their capital adequacy ratios.

It is noteworthy that the drop in the bad loan ratio has been achieved during a period of rapid expansion of credit, with excessive investment driving the economy to the brink of overheating.

The latest figures from the central bank show that commercial bank loans increased by 16.3 percent in the first seven months year on year.

To improve the banks' risk control capacities, the regulator said it has been focusing on key battles, namely, the reduction of bad loans and a crackdown on financial crimes in the banking sector.

In the first six months of the year, Chinese banks reported 480 cases of illegal loans and mismanagement, down from 569 cases in the first half of 2005. The majority of these cases were discovered by banks during internal audits.

In the same period, Chinese banks fired 231 employees for involvement in irregularities and 1,559 others received sanctions, the regulator said.

Source: Xinhua