Jul. 22 – The chairman of  China’s Banking Regulatory Commission (CBRC), Liu Mingkang, has told all mainland-based banks, and some overseas banks such as HSBC and Citigroup to increase their bad-debt loan reserves by 150 percent by the end of this year.

That means that banks are now being required to be set aside an additional RMB70 billion. This comes amid concerns of deteriorating asset quality within the banks and worries about a toxic loan fallout from China’s stimulus plan.

Liu said on the CBRC website that: “Rapid growth in banking loans has led to accumulated risk” and that “some banks have extended loans without due diligence.”

Mainland banks extended RMB7.37 trillion in loans in the first half of this year, following a government led spending spree through the fiscal stimulus plan designed to encourage Chinese consumers to buy and to spur a number of provincial and local level infrastructure projects.

The amount loaned was triple that of the same period in 2008. An official at the State Council Development & Research Center stated that close to RMB1.2 trillion – or over 16 percent of the total stimulus plan – has been illegally invested in stocks.

Bad loans at mainland banks currently stand at RMB443.6 billion and an increase in bad debt provisions may lead to more serious problems emerging in 2010, as pointed by an analysis of China’s recently released GDP figures here, which on paper look positive, but in the main have actually been achieved through the investment impact of the same fiscal stimulus plan. Reducing tax revenues are also becoming a concern.

Analysts however expect mainland banks to show a 10 percent increase in earnings this year, with loan rollovers and maturity extensions delaying an impact of bad debt in the short term. In the long-term however, it does not appear the problem is going to get better.

Fitch Ratings commented that at the Agricultural Bank of China, provisions for an extra RMB247.9billion for loan losses may need to be made – a figure equating to 378 percent of its 2008 pre-tax profit.