China’s state-run banks could be in trouble

While not downgraded by credit ratings agencies, China’s huge state-owned banks are cause for serious concern in the weakening economy.

There are early warning signs about Asia's banks generally, although most are healthy, said Mark Young, financial institutions group managing director of Fitch Ratings, Ltd.

His biggest concern is China's state banks that cornered much of the government's massive stimulus package in 2008.

"They have got a lot of money, our concern is that it is being lent to projects, developments that are not going to necessarily generate a return and these loans will ultimately go bad," he noted.

Young has also been trying to assess the level of bad or non-performing loans these banks are carrying. He believes a lack of transparency and risk management means these loans are actually understated and are growing.

"The issue is that it is unregulated, the risks are unknown in terms of the other side of the balance sheet.

Some analysts remain concerned about the performance of some of China's big banks despite these banks not being included in last week’s downgrade of some of the world's biggest banks. They noted that four of the seven biggest commercial banks in the world are in China and haven't been assessed. These four account for half of China’s banking system.

Moody's Investors Service last week cut the ratings of world's 15 biggest banks including Bank of America, J P Morgan, Goldman Sachs, Citigroup and Deutsche Bank, saying they have significant exposure to volatility and capital market risks.