August has been a bleak month for investors in the mainland's four biggest banks. Shares in the largest lender, ICBC, nosedived to a 52-week low yesterday. And the mainland's other 'big four' lenders - Agricultural Bank of China, Bank of China and China Construction Bank - have also slumped on fears they will be forced into emergency fund-raisings. But while their share prices are perilously close to October 2008 levels, some analysts say the banks are not cheap enough to account for a likely wave of bad debts that could swamp their balance sheets and leave them thirsty for cash. 'Investors think the banks will require new capital,' said Charlie Awdry, manager of British investment house Gartmore's China fund. Mainland banks extended 17.5 trillion yuan (HK$21.31 trillion) in new loans in 2008-09, under orders from Beijing to stimulate the economy. Much of this debt was doled out to local governments. Municipal authorities then ploughed money into major infrastructure projects such as highways and airports, which in many cases are failing to generate enough cash to service borrowings. Mainland banks may need to tap shareholders for around US$700 billion to fund bad loan write-downs, according to economists at Spanish bank BBVA. BBVA's estimate covers every mainland bank. The big four banks account for about 45 per cent of total banking assets on the mainland. So unless their loan quality is much higher than that of second-tier lenders, the big four may need to raise about US$315 billion. Former People's Bank of China governor Wu Xiaoling said on Saturday that the big four banks only needed up to 500 million yuan. Still, even that conservative estimate was enough to send mainland bank shares tumbling. ICBC fell 1.6 per cent yesterday, and China Merchants' Bank, the mainland's largest non-government-owned lender, dropped 2.4 per cent to a 52-week low. BBVA's Hong Kong-based economists Alicia Garcia-Herrero, Stephen Schwartz and Le Xia believe municipal borrowers will default on 3 trillion yuan of bank loans. Local governments are already showing signs of financial strain. Shanghai Rainbow Investment, a local government financing vehicle responsible for funding and overseeing transport projects, has been unable to repay overdue short-term loans of several hundred million yuan, two bankers told this newspaper on June 30. And in April, a local government financing vehicle named Yunnan Highway Development Investment informed creditors, including ICBC, China Construction Bank and China Development Bank, that it would only be able to pay interest on its almost 100 billion yuan worth of loans. Douglas Turnbull, China fund manager for Neptune Investment Management said it was 'too difficult to price the risk of holding Chinese banks' equity. The question is political.' While he said he did not doubt there would be large-scale local government debt defaults, he was unsure whether the central government would pay off the bad loans, and, if so, at what level of the mainland financial system this bailout would occur. Beijing is the majority shareholder in the mainland's four biggest banks. Turnbull said the central government, which encouraged municipal authorities to borrow in the first place, could pay off their unserviceable loans, leaving the banks unaffected. Otherwise, he said, Beijing could allow the municipal borrowers to default and then rescue the banks. Or bank shareholders could foot the whole bill. In the late 1990s, non-performing loans almost crippled China's four biggest lenders, after a wave of defaults by state-owned companies. Beijing allowed the banks to take the losses, rather than paying off the companies' debts for them, and then spent close to US$300 billion bailing the big four lenders out in 1998. BBVA's economists reckon mainland banks will have to pay for local governments' bad loans. But according to the Spanish bank, the central government will help the lenders deal with the debt write-offs. 'It does not seem likely that banks on their own will have to bear the full cost,' BBVA said in a July 22 note. 'A combination of government and banking sector involvement would be needed.' ICBC declined to comment.