Chinese banks move to shore up balance sheets as bad loans rise by Geoffrey Smith @FortuneMagazine 6:03 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons China’s banks are bolstering their balance sheets as they come to terms with a rise bad loans caused by the economy’s slowdown – and they aren’t being too choosy how they do it. China CITIC Bank, the bank owned by the country’s largest investment firm, said Thursday it would sell up to 11.9 billion yuan ($1.94 billion) in new shares in a private placement to China National Tobacco, maker of the country’s most popular cigarette brand. As such, that’s basically moving money from one state pocket to another. But China’s banks are looking further afield too. Bank of China announced last week it would raise $6.5 billion in international markets in the form of s0-called “contingent convertible” debt, that is, bonds that convert automatically into equity when a bank’s capital ratio falls below the level required by regulators. Agricultural Bank of China, another of the country’s biggest lenders, is preparing to issue preferred shares. Under China’s implementation of the post-crisis “Basel III” accords, agreed globally, banks will have to have total capital equal to 11.5% of their assets on a risk-adjusted basis by 2018. That shouldn’t be a problem given that the high ratios they have traditionally reported. But the slowdown in the economy this year has led to a sharp rise in non-performing loans. Although that’s been particularly true for the real estate sector, there have also been reports of problems at a broader range of state-owned companies hit by the country’s switch away from investment- and export-driven growth. In particular, many of the country’s iron ore mines are unprofitable due to a flood of cheap supply from Australia, while the steel producers themselves are shipping more and more abroad at ever-lower prices, unable to find buyers at home, traders say. Industrial and Commercial Bank of China, the world’s biggest bank by assets, said late Wednesday its non-performing loans rose 9% in the third quarter, their biggest jump in at least eight years, according to Bloomberg. Its net profit was still up 7.7% on the year, however, in line with forecasts. Bank of Communications, the country’s fifth-largest bank, also reported its sharpest rise in NPLs in over two years, Reuters reported. In a filing to the Hong Kong Stock Exchange, it said it saw a rising risk of a credit crunch spreading from the southern and eastern coastal areas to central and western areas. The officially reported level of NPLs is still extremely low at barely 1% of the total, but analysts suspect the actual level to be higher.