Ratings raised after state bank bailouts

Standard & Poor's yesterday upgraded its outlook on both the Bank of China and China Construction Bank to 'positive' from 'stable', a day after the mainland government announced it had injected US$45 billion in cash into the two state banks.

Standard & Poor's described the move as a positive step towards reforming China's ailing banking sector but it questioned whether the amount would be sufficient to restore the solvency of the financial system.

'The announcement of direct financial support confirms a shift in the position of the Chinese government towards stronger banking reform,' it said.

'Prior to this most recent commitment, the form that such support might take was unclear, as was its timing, despite an apparent need for financial assistance for the state-owned commercial banks.'

Other rating agencies also responded positively to the news - the latest bailout involving its Big Four state banks by the mainland government - though concerns remain over how the injections have been implemented.

Fitch pointed out that since the recapitalisation was financed by the country's foreign-exchange reserves, the banks' balance sheets may contain excessive foreign-currency assets - a risk should the yuan be devalued.

Fitch also highlighted the government's decision to help only two of the Big Four state banks, saying it reflected a new 'carrot and stick'-based approach that penalises banks lagging in their efforts to reform.