Debt threat: Top 5 Chinese banks face massive bad debts

Shares of China's five biggest banks lost an average 22% in 2011 on concerns that a record two-year credit boom may unravel and lead to rising bad debts.

Led by Industrial & Commercial Bank of China Ltd (ICBC), the world's biggest commercial bank by market value, the top 5 banks raised a combined 236 billion yuan from equities in 2011, accounting for 75 percent of total bond issuance.

ICBC, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications are scrambling to issue subordinated bonds in 2012 to replenish their capital base amid sluggish performances in the capital market, according to a report in the Shanghai Securities Journal.

Chinese banks have been seeking to raise more capital through all available channels (including bond sales) as they confront higher capital requirements, increased lending due to relatively looser credit controls in 2011 and declining deposits.

The high threshold of equity-financing approval in a bearish stock market has increased lenders' interest in raising money through selling bonds.

"The increasing issuance of debt in the interbank market will gradually lead to a deterioration of the asset quality of commercial lenders," said Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics.

In 2011, commercial lenders in China raised more than 300 billion yuan to bolster their capital by selling subordinated bonds, an increase of 2.4 times on the 90 billion yuan in 2010.

Rather than postponing implementation of the new requirements, Guo suggested that the China Banking Regulatory Commission (CBRC) should allow lenders to add medium- and long-term deposits, such as five-year deposits, into the capital category to obtain a higher CAR.

Officials at the CBRC have urged commercial lenders to rely on themselves when they seek more capital, instead of eyeing external sources.