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Bank of China, China Construction Bank and other Chinese lenders have adopted new accounting rules that change the way they set aside money to cover potential bad loans, increasing the profit on their books.

Lenders must set aside at least 1 percent of their risk-weighted assets — instead of total loans as previously required — as "general purpose provisions" against possible loan losses, under the rules published by the Ministry of Finance. The provisions are now considered part of shareholders' interests. Previously, they were deducted from bank' net income.

"By counting provisions as net income, it will make lenders' books look better," said Liang Jing, a Shanghai-based banking analyst at Guotai Junan Securities.

The government has urged the nation's lenders to clean up their books and set aside adequate funds to cover potential losses. China will fully open its banking sector to Citigroup, HSBC Holdings and other overseas lenders by the end of next year.

The rule change would boost the profit of China Merchants Bank, the nation's biggest publicly traded lender, by 18 percent this year, according to a research report by Guotai Junan Securities.

Shenzhen Development Bank, which is controlled by San Francisco-based buyout firm Newbridge Capital, would see its net income increase by 36 percent after it adopted the new accounting method, while profit at Shanghai Pudong Development Bank, the partner of Citigroup, would rise 14.6 percent, the report said.

Counting loan provisions as part of shareholders' interests would also increase banks' net assets and raise their core capital adequacy ratios, Guotai Junan's report said.

"The move will make banks less reluctant to set aside provisions, because it won't dampen their profit," said Qiu Zhicheng, a Shanghai-based banking analyst at Xiangcai Securities.

Banks must also set aside provisions for loans that have already been classified as nonperforming, according to the new rules.

(Shenzhen Daily July 4, 2005)
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