Just how big the pool of bad loans is in the mainland's banking system has become a hot topic among economists and bankers, and even China's banking regulator, at financial forums in Beijing recently.
According to the China Banking Regulatory Commission (CBRC), the proportion of non-performing loans to total loans at mainland commercial banks stood at 0.95 per cent at the end of the third quarter.
The regulator has repeatedly said the bad-loan risk in the nation's banks is manageable. Bankers, too, have said they are comfortable with their conservative loan-loss provisions.
Yet, industry analysts contend the official figure belies potential risks in the system for two reasons. First, corporate borrowers are refinancing themselves by simply borrowing from other sources to repay maturing bank loans. Second, an increasing source of credit through so-called shadow banking is actually kept off the banks' balance sheets and could come back to bite them.
"The refinancing risk has yet to emerge", because so far borrowers had been able to raise funds elsewhere to service their bank debt, said Liao Qiang, an analyst with Standard & Poor's.
Enterprises have been tapping the domestic bond market, among other sources, effectively borrowing to repay old loans. "Practically, there is no problem, but the problem is how long such a situation can be sustained," said Liao. "There's no doubt that the asset quality is weakening" on banks' books, he said.
That meant the relatively low official non-performing loan ratio of less than 1 per cent understated the actual risk level, he said.
Furthermore, Liao said, the official figure did not reflect bad loan conditions at small lenders, where non-performing loan ratios went up at a faster pace than at commercial banks. He estimated the overall bad loan ratio would be 2 per cent if smaller banks were included. The credit conditions of medium- and large-scale enterprises, which were exposed to the "construction boom", were most worrying, Liao said. These enterprises geared up to produce such goods as steel and cement and now face oversupply and lower prices as the economy has cooled.
"They may have cash on hand now, but the credit problem will eventually emerge," he said, expecting the situation to deteriorate in next year's third quarter.
Changjiang Securities analyst Liu Jun has also noted the borrowing-to-repay trend but he said this was normal practice for mainland enterprises. He is more optimistic about Chinese banks' asset quality, forecasting the non-performing loan ratios to stay around present levels through the first quarter of next year, and then improve in the second quarter.
"You can't compare China's situation with other countries', the economic policy is so different," he said, shrugging off contentions that the current level of bad loans is artificially low.
Still, he agreed with critics that the official data didn't disclose potential pitfalls. " We are concerned about the risk of shadow banking," which mainly refers to often high-yielding wealth management products, underground finance and off-balance-sheet lending, such as trust loans that are extended by wealth-management firms rather than banks.
Liu pointed to recent developments at Huaxia Bank in Shanghai. Earlier this month, panicked investors rushed to the branch after reports that a wealth management product - offering an annual interest rate of 11 per cent, more than triple the central bank benchmark - had stopped making payments. The bank blamed a rogue employee.
Liu expects similar cases in future. "We will see the exposure of products that have not complied with regulations, and also rising default risk."