China Construction Bank (CCB), the world’s second-largest lender by market value, said an increase of about a tenth in its non-performing loans in the last quarter was due in part to it tightening its loan standards, prompting it to set aside more money for bad debt. Rising bad loan costs among Chinese banks highlight growing concern that non-performing loans (NPLs) are likely to increase as growth in the economy slows. Premier Wen Jiabao this month forecast sub-8 per cent GDP growth for the first time in eight years. “We’ve been very diligent about how we classify our loans, maybe even more so than the regulators and other banks,” CCB Chairman Wang Hongzhang told reporters on Tuesday. “Our NPL numbers may look higher than some competitors, but our credit quality is definitely as good or even better than everybody else.” CCB’s total non-performing loans rose almost 10 per cent in October-December, a reflection, too, of a deterioration in the manufacturing, real estate and retail sectors, the bank said. “The price-to-book ratio of many Chinese banks implies that NPLs should be higher than reported,” said Khiem Do, a fund manager at Barings Asset Management, which has almost $48 billion in assets under management globally. “The poor share performance has reflected concern over NPLs in the Chinese banking sector.” Shares in the country’s so-called “big four” state-owned banks, collectively worth some $700 billion, have fallen 9-14 per cent this month, underperforming the broader Hang Seng benchmark’s 4.7 per cent decline. The big-four -Industrial and Commercial Bank of China, CCB, Agricultural Bank of China and Bank of China — account for about 40 per cent of total loans in China. CCB extended about 150 billion yuan ($23.8 billion) worth of loans in January-February, with lending growth expected to rise more quickly this year than last year’s 14.5 per cent growth, it said. It still has some 430 billion yuan worth of local government debt on its books, which had an NPL ratio slightly above its overall loan portfolio, said Wang. China’s banking regulator has told lenders they incorrectly classified about 20 per cent of their outstanding local government loans into the safest category of lending, Bloomberg reported on Saturday, citing an unnamed person with knowledge of the matter. The banks underestimated the risks on about 1.8 trillion yuan ($286 billion) worth of local government lending when they decided the loans were fully covered by cash flow, the report said, adding that reclassifying the loans would require more money to be set aside, and this could eat into earnings. “We have been cutting back on our exposure to local governments, and although the NPL ratio is slightly higher, the risks are under control,” Wang said on Monday. MAJOR THREAT To build infrastructure across China and stimulate economic growth, local governments borrowed heavily from banks in 2009-10 and are now seen as a major threat to the economy as many cannot repay their debts. The government said last year that local governments had borrowed an estimated 10.7 trillion yuan, and analysts estimate at least a fifth of the loans may be delinquent. “They are trying to manage the quality of their loans very tightly, but NPLs is an issue the market is very concerned about and any tick upwards will not be good,” said Patrick Pong, an analyst at Mirae Asset Management in Hong Kong. “If the economy slows, credit quality will naturally worsen.”CCB, which counts Singapore state investor Temasek as a stakeholder, posted a 23 per cent rise in October-December net profit to 30.25 billion yuan ($4.8 billion), according to Reuters calculations from full-year numbers. Full-year profit rose 25 per cent to 169.3 billion yuan, just shy of a mean estimate from 25 analysts surveyed by Thomson Reuters.