As China Construction Bank launches IPO, watchdog trains fire on financial laxity Until recently, state companies could depend upon top bureaucrats to offer supportive noises in the official media during events such as a maiden international public share offering by one of the Big Four state banks. What is more, they could reasonably have expected to have problems - and perhaps even dirt - conveniently ignored until a later date. However, if a public statement from the China Banking Regulatory Commission (CBRC) on Friday is anything to go by, those days may have passed. Summing up a routine inspection of 11 key state-controlled banks last year, it warned that a number remained burdened with high non-performing loan (NPL) ratios or at the very least were underestimating the problem. The statement pointed to a potential slide back into crisis for a banking sector bailed out only recently. Lenders were guilty of injecting capital to rehabilitate deadbeat borrowers in the hope of recovering NPLs. Local governments were taken to task for insufficient sources of income to fund bank loans stemming from an orgy of infrastructure spending. Lenders were also chided for lax procedures and lacklustre post-lending monitoring of their retail loan business. 'Lending to railroad, aviation and highway projects had potential high risks,' the statement said. 'Loans to group companies were over-concentrated.' The statement hit the CBRC's website on the same day that China Construction Bank (CCB), the mainland's third-largest commercial bank by total assets, rolled out its initial public offering to Hong Kong's retail investors. It is hard to overestimate the importance of bank listings to sector reform. Yet the broadside was the second critical report to emanate from the regulator within the space of a week. Shenzhen's Securities Times newspaper last week published a leaked CBRC report projecting NPLs in the country's banking sector would rise by more than 30 billion yuan this year, in the aftermath of economic tightening measures. Such candour suggests that public offerings are no longer seen as simple fund-raising exercises. Among China's commercial banks, CCB was the second-largest lender of infrastructure loans with a 27.7 per cent market share by the end of June. Infrastructure loans similarly represented 21.2 per cent of its lending. By the end of last year, it had outstanding loans to three group borrowers each equal to between 15.7 per cent and 16.1 per cent of its regulatory capital, above the CBRC's 15 per cent cap. It became fully compliant with the rules only in June through such measures as not rolling over some loans. The sudden collapse of group companies such as D'Long and Guangdong Kelon hit mainland banks hard, a problem intensified by lenders' previously decentralised credit approval systems and limited credit control data. CCB has the lowest NPL ratio among the big four state banks, at 3.91 per cent. Yet the bank's executive vice-president, Fan Yifei, was noncommittal last week as to whether the lender would see a net increase in the absolute value of outstanding problem loans by the end of this year. 'We saw some increase in the balance of our NPLs in the first half but the NPL ratio continued to fall,' Mr Fan said. Predictably, he added: 'We will continue to try to control NPLs in the second half.'