The report states that, amid the tug-of-war of multiple factors, commercial banks' non-performing loan (NPL) ratio will fluctuate modestly and remain largely stable in the short to medium term. Although the Federal Reserve's balance-sheet reduction path and timing are still unclear, it remains a high-probability event for the period ahead. This will put upward pressure on the USD/CNY exchange rate, and China may gradually tighten monetary policy, pushing interest rates higher, raising operating costs and debt risks for some enterprises and driving the NPL ratio up. At the same time, however, China's urbanization is still accelerating, new development zones are sprouting everywhere, industry clustering and corporate management keep improving, and risk resistance is strengthening accordingly, reducing the sources of non-performing loans.

　　The report notes that medium- and long-term loan quality problems persist. In terms of NPL structure, the substandard loan ratio peaked at 0.82% in Q1 2016 and then declined quarter by quarter to 0.7% in Q4. The ratios of doubtful and loss loans kept rising, reaching 0.77% and 0.28% respectively in Q4, up 0.08 percentage points year on year. This shift means the banking sector has stepped up NPL disposal and used bank profits to absorb substandard loans; in addition, commercial banks always increase NPL write-offs at quarter-end, so short-term data improvement does not mean the banking sector has emerged from its difficulties.

　　The report analyzes that China's NPL ratio remains internationally low: from 2009 to 2013 it stood around 1%, close to the lowest level worldwide. In Q1 2017, this indicator was 2.16 percentage points below the global average and only 0.71 percentage points higher than North America. As economic structural adjustment deepens, even if the NPL ratio rises, it will remain within a normal range.

　　The report concludes that the quarter-on-quarter decline in the NPL ratio reflects domestic demand driven by urbanization and the efforts and effects of the banking sector in improving asset quality. In the short to medium term, due to the interplay of various factors, commercial banks' NPL ratio will keep fluctuating modestly and remain broadly stable. Looking at the medium- to long-term trend, affected by the slowdown in national macroeconomic growth and the relatively lagging build-out of the NPL disposal system, China's commercial banks' NPL ratio still has reasonable room to rise from its internationally low level. (End)