Regulator cites progress in reform drive but analysts say the figures have been boosted by bond issues Thirty mainland banks, accounting for nearly 50 per cent of the industry's assets, met the 8 per cent minimum capital adequacy ratio (CAR) requirement by the end of last year, according to the country's chief banking regulator, Liu Mingkang. However, analysts said the figures had been boosted by massive subordinated issues that would not provide a long-term solution to the problem of capital shortages at China's rapidly expanding banks. The China Banking Regulatory Commission ruled in March last year that banks were required to have at least an 8 per cent CAR and 4 per cent core CAR by the start of 2007. The number of mainland lenders, including urban commercial banks, that met the requirement expanded from eight at the beginning of last year to 30 by December, said Mr Liu, the commission chairman, in a statement distributed at a briefing during the National People's Congress meeting yesterday. Their assets as a proportion of total banking assets in China had soared from 0.56 per cent in January last year to 47.53 per cent by year-end. The commission aims to bring that ratio to 70 per cent by the end of this year. Also at yesterday's briefing, People's Bank of China governor Zhou Xiaochuan said stock market listings were not too distant for China Construction Bank and Bank of China. 'They have largely completed their financial restructuring,' he said. 'Although there's need for further corporate governance improvements and internal reforms, one should say the initial public offerings are not too distant.' On average, the CAR of the Big Four state-owned banks and 12 smaller national shareholding lenders rose 2.87 percentage points last year. An increased capital base helped narrow the shortfall in banks' loan loss provisions by 100.2 billion yuan during the year. On closer examination, the CARs were boosted to a large extent by a combined 112.2 billion yuan of subordinated bonds sold during the year to help banks recapitalise. Some banks with a CAR of more than 8 per cent witnessed a drop in the ratio during the year as they pursued aggressive expansion plans to grab market share before the mainland banking sector is thrown open to fully-fledged foreign competition at the end of next year. Mainland-listed Shanghai Pudong Development Bank, 4.62 per cent owned by Citigroup, saw its CAR drop 0.61 percentage points during the year to 8.03 per cent, stretched thin by the 21.8 per cent increase in outstanding loans to 310.9 billion yuan despite a six billion yuan subordinated bond sale during the year. Reductions such as this suggest frequent debt or equity offerings might be needed to keep pace with the breakneck expansion of their deposits and loans. It also begs the question whether the government-supported recapitalisation efforts are only fuelling another round of irrational growth. Macroeconomic controls could worsen mainland banks' CARs by raising their lending risks and creating new non-performing loans as well as hurting lenders' retained earnings. Arthur Lau Chu-ming, a Barclays Capital analyst in Singapore, also noted that the quality of capital was a key consideration, with core or shareholders' capital preferred as shareholders' claims rank behind creditors' in liquidation.