| The 2012 annual reports released by the five major Chinese banks showed the Yangtze River Delta Economic Region has been severely affected by bad loans. Take Agricultural Bank of China (ABC) and China Construction Bank (CCB) for example. Non-performing loans in the region accounted for 23 percent and 44.1 percent of the total, rising from 0.98 percent and 1.31 percent to 1.19 percent and 1.97 percent respectively.
The same is true for the manufacturing industry. Statistics show for CCB, ABC and Bank of China (BOC), the manufacturing industry made up 41 percent, 38.7 percent and 35.7 percent of total non-performing loans respectively.
In fact, alarm was sounded as early as 2011. According to the China Banking Regulatory Commission, the ratio of non-performing loans for small businesses had reached 2.02 percent by the end of 2011. The Yangtze River Delta Economic Region, which was harassed by private lending and struggling small and medium-sized enterprises, contributed much to the rebound in bad loans. In 2011, non-performing loans in Zhejiang Province surged 21 percent.
The Yangtze River Delta Economic Region is home to many cities featuring rapid economic growth, great economic aggregate and huge development potential. But now, bad loans are undermining the sustainability of the region.
Why was the region severely hit by bad loans? On the one hand, since the Chinese economy began to slow down in 2012, small and micro enterprises have been beset with problems like running below capacity, reduced orders and rising costs of raw materials and labor. Meanwhile, mired in a debt crisis because of excessive borrowing from private lenders, a number of enterprises have shut down with their owners taking flight. The spillover effects of the crisis threaten the security of banks credit capital.
On the other hand, many enterprises in the region have been depressed by ruptured debt chains. Since 2012, problematic debts in the Yangtze River Delta Economic Region have mostly taken the form of operational default, and the default of small and medium-sized enterprises and private enterprises has led to shrinking earnings, heavy losses, mounting accounts receivable and accounts payable and a prolonged capital return period. Affected by excess production capacity, price dropping and investment losses, industries like steel, machinery, coal and electricity are prone to new debts chain.
To achieve the sustainable development of the manufacturing industry in the region, focus should be laid on regional integration. With Shanghai as the leading force and Jiangsu and Zhejiang provinces as the two wings, regional industrial clusters should be formed to coordinate with each other, which will enhance the overall competitiveness of the manufacturing industry in the Yangtze River Delta.
Financial reforms underway in Wenzhou must continue, which will improve the financial environment and financial services of the Yangtze River Delta Economic Region. Commercial banks should strengthen credit risk management to prevent bad loans.
In addition, more effort should be made to optimize the structure of loans. In keeping with the principle of ensuring stable economic growth, more credit resources should go toward infrastructure, emerging industries of strategic importance, agriculture, and small and micro enterprises, in order to reduce financing difficulties in these sectors.
Last but not the least, there should be more transparency in credit ratings and information disclosures of enterprises and individuals, which will effectively reduce or even eradicate the evasion of bank debts and further improve the credit environment of the Yangtze River Delta Economic Region.
This is an edited excerpt of an article by Wang Yong, a professor from the Zhengzhou Training Institute of the People's Bank of China, published in Shanghai Securities News | 
