Standard & Poor's believes up to 70 per cent of the mainland's loans could potentially be 'problematic' - but that is not something that is worrying the ratings agency for now. The mainland was named along with the Czech Republic, the Slovak Republic and Romania as being 'Systems Under Stress Because of Inefficient Economic Structure', in a biannual paper on 68 countries' financial systems S&P has been publishing since the 1997 Asian crisis. 'Directed lending to loss-making enterprises and public projects, the lack of transparent legal and accounting codes and the poor credit skills of banks against the backdrop of an economic slowdown have led to a high level of non-performing loans - at least 50 per cent of total loans - in the banking system,' the report, published this month, said. In a 'reasonable worst-case economic scenario . . . gross problematic assets' in the financial system could be 70 per cent, the report said. The S&P figures are higher than previous estimates of the mainland's non-performing loans. Last year, the World Bank estimated them to be 20 per cent of lending while People's Bank of China Research Institute director Xie Ping put them at 25 per cent of state-owned commercial bank lending. Despite the high figure, S&P sovereign ratings managing director David Beers yesterday told the Business Post the agency had no intention at present to alter the stable outlook for Beijing's BBB sovereign credit rating. 'It is not as if we are sitting here and thinking that China's banking system is one that is fundamentally unmanageable,' he said. Cleaning up the bad-loan problem and fully recapitalising the banks would cost up to 70 per cent of mainland gross domestic product, he said. 'If it turns out [that] over time the cost of all this [is] even greater than we expect, that could endanger the rating,' Mr Beers said. 'Our view of the banking system dynamics really hasn't changed much in the last two years. The reason we have a stable outlook on the rating is we haven't seen anything new on the horizon that leads us to believe it is going to be costlier to fix than we presently see.' The high cost of the bank clean-up would make Beijing more indebted and could potentially endanger its ability to repay loans. 'That process has barely begun,' Mr Beers said. 'When it is completed China will be a much more leveraged government than it is today and therefore it will be fiscally weaker than it appears to be on paper today.' The big-four state-owned commercial banks last year formed asset-management companies to take over their bad loans. But the S&P report said their combined paid-in capital of 40 billion yuan (about HK$37.47 billion) was not likely to be enough to absorb all the losses. The Government used the banking system to re-invigorate slowing growth with policy lending from 1993. The report said: 'This has resulted in credit growth continuously exceeding economic growth in the past four years. 'Domestic credit to the private sector and non-financial enterprises is estimated to exceed 120 per cent of [gross domestic product this year] from only 87 per cent in 1995.' S&P rates Hong Kong's sovereign credit at A, three notches higher than Beijing's. Since the 1997 handover, the fate of the SAR's rating has been tied to the mainland's by the agency. 'Other things being equal at the moment, if China's rating changed up or down, then Hong Kong's rating most likely would change for that reason,' Mr Beers said. 'It is possible that something could happen that would cause us to change the rating independently of China but that is something we don't presently perceive,' he said. Morgan Stanley Dean Witter analyst You Jingfeng said S&P's estimate of the problem loans in the mainland banking system sounded too high. But he added: 'Nobody has looked at the loan books so it's anybody's guess.'