The central government's efforts to curb dangerous overcapacity in some industries such as shipping could lead to a drop in non-performing loans or NPLs this year, claims Yan Qingmin, a vice chairman of the China Banking Regulatory Commission (CBRC), the banking sector regulator.

Yan noted that the average NPL ratio of Chinese banks, which stood at 1.03 per cent in 2013, could probably be limited to around one percent at the end of 2014 since banks had set aside enough provisions to cover their NPLs. The December NPL ratio was the highest level in two years, said CBRC.

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Recent financial results from China's top banks, however, have revealed an upsetting increase in NPLs that seem to contradict Yan's optimism. This January and February, the amount of NPLs rose significantly by US$9.65 billion in Guangzhou and Foshan. One Guangzhou bank said its NPL ratio jumped to 50 percent because of soured loans to small and medium enterprises.

Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), China Merchants Bank and China CITIC Bank reported larger bad loans. Government sources said the new NPLs mostly came from the metal manufacturing sector that includes the steel, iron and aluminum industries and metal trading firms.

China's five largest banks reported a total of US$60 billion in outstanding NPLs in 2013, some US$7.6 billion higher than in 2012.

The top five banks are ICBC; Agricultural Bank of China (ABC); Bank of China (BOC); CCB and Bank of Communications. The first four banks are state-owned banks collectively referred to as the Big Four. Bank of Communications is also a state-owned bank but is not as large as any of the Big Four.

Commercial banks' outstanding NPLs stood at US$95 billion by the end of last year, up US$15.9 billion) from 2012. Smaller banks, however, are bearing the worst of the NPL crisis. Smaller banks, are in an even worse fix. The outstanding NPL of two of the leading small banks, China CITIC Bank and China Everbright Bank, jumped 63% and 33%, respectively.

Major banks have been reducing loans in risky sectors to stem the NPL surge. Last year, ICBC's outstanding loans to local government financial vehicles or LGFVs, property developers and overcapacity industries fell byUS$15.2 billion, US$1.4 billion and US$3.2 billion, respectively.