Commercial banks’ ratio of bad loans increased in the third quarter around 0.97%, up from 0.9% at the end of the second quarter, while the provision coverage ratio for the sour loans declined, according to figures from the China Banking Regulatory Commission (CBRC). The provision that banks set aside as a buffer reached 290.1% of the NPLs at the end of the third quarter, 11 percentage points higher than at the beginning of the year, but 0.1 percentage point lower than three months earlier. NPLs reached CNY456.4 billion by the end of June. Analysts still doubt banks have covered the risks sufficiently. By the end of June, the top 10 lenders’ outstanding overdue loans reached CNY489 billion, up CNY112.9 billion from the start of this year. Analysts had forecast that the third quarter results would show a “double-jump” in both NPLs and the ratio, similar to the fourth quarter of 2011. Although the NPL ratio of Chinese banks seems low, the potential risks are worse than the official data suggest, Xiao Gang, Chairman of the Bank of China (BOC), said in a commentary published in the China Daily. “Many industries have excessive capacity after years of aggressive expansion, and a lot of money has become involved in property speculation. Eventually, indebted companies may fall into default or hit severe cash flow problems.” By the end of September, outstanding loans to small businesses, which bear higher risks, reached CNY14.2 trillion, up by 18.2% year-on-year, 1.8 percentage points higher than the average loan increase. Major banks would probably register net income growth of 11% in the third quarter, down from 13% in the second quarter, said May Yan, Director of Barclays Capital Asia, the China Daily reports.

The Chinese subsidiaries of four overseas banks have made it to the list of China’s top 50 banks, a Standard and Poor’s (S&P) report said. HSBC China, Bank of East Asia China, Standard Chartered Bank China and Citibank China are listed among China’s top 50 banks by assets after years of expansion and investment in the country. The top 50 banks’ combined net profits sextupled to CNY995.1 billion from 2007 to 2011, accounting for 76.3% of the banking sector’s total profits. The foreign banks’ subsidiaries heavy investment in retail banking has yet to prove positive to their profitability, S&P said. The top four overseas lenders made a combined after-tax net profit of CNY6.9 billion last year — more than double from a year earlier, an earlier KPMG report said. S&P said the rising profits of foreign banks last year mainly reflected their improving cost efficiency, as operating expenses related to network expansion declined.

The Bank of China’s net profit in the third quarter grew by a surprising 17% to CNY34.8 billion, accelerating from 5.3% in the second quarter. The bank’s net interest income jumped 15% annually to CNY65.4 billion in the third quarter. BOC’s non-performing loans rose to CNY64.1 billion from CNY63.6 billion in the period. The Agricultural Bank of China (ABC) posted a 16% rise in third-quarter net earnings, beating analysts’ estimates. Net profit at the nation’s third-largest lender by assets rose to CNY39.6 billion in the July-September period. The bank tapped the rising demand for credit over the past quarter as a seven-quarter slowdown in China’s economic growth may be ending. Its net interest income rose 8.8% to CNY85.5 billion in the third quarter and net fee and commission income gained 8.4% to CNY19.2 billion. The lender’s net interest margin widened by 2 basis points to 2.82% in the first nine months of this year.

Almost a quarter of Japanese manufacturers are rethinking their investment plans in China and some may shift future production elsewhere according to a Reuters Corporate Survey. The concerns suggest the recent rift between China and Japan over the Diaoyu islands in the East China Sea could mark the end of a boom that has played out over two decades in which Japanese companies have emerged as the most active source of foreign direct investment (FDI) in mainland China after Hong Kong and Taiwan. Since 1990, Japanese companies led by electronics makers like Panasonic and followed by a wave of automakers like Nissan Motor and Toyota Motor and their suppliers have poured almost USD1 trillion into Chinese factories, Japanese government statistics show. The investment by more than 20,000 firms created over 1.6 million jobs as Japanese companies looked to take advantage of low production costs and then China’s potential as a surging market for everything from cars to cosmetics. Now, sentiment has turned. When asked if their attitude towards using China as a production hub over the medium term had changed, 37% of Japanese companies surveyed said they had grown more cautious. Almost half of Japanese manufacturers said they expected to see lower sales in the current fiscal year. In response to a separate question, 24% said they were considering delaying or reducing planned investment in China. 18% said they were considering shifting production to other countries. The Reuters survey of 400 Japanese companies took place between October 1 and October 17.

Analysts and executives said the shift from China would come first for low-margin businesses where labor costs are crucial, like clothing and household electrical products. For manufacturers that depend on sales in China, like Japanese car and auto parts makers, there is no choice but to slow production and hope the anti-Japanese sentiment subsides and inventories can be sold down, the South China Morning Post reports. Sino-Japanese two-way trade grew 14% to a record USD345 billion last year. For last year, Japanese direct investment in the Southeast Asian region surpassed China by a margin of almost 50%, according to data from Japan’s Finance Ministry. But experts and company executives say it will take years before Southeast Asia can compete with China on factors that are harder to measure than payrolls, like a large pool of skilled talent and a developed network of suppliers. Chinese statistics show that by October last year there were 33,400 Japanese companies and affiliates operating in China, up 75% from the already high figure of the year before. Already in 2010, Japanese companies employed three million Chinese and accounted for 16% of all foreign companies in China. Statistics compiled by Reuters show that Japan’s investment in China reached almost USD13 billion last year, a rise of 60% from the year before. Total Japanese investment in China over the past 15 years has topped USD80 billion.

China became the world’s top destination for foreign investment in the first half of this year, edging the U.S. out of the top position for the first time since 2003. But the U.S. may reclaim the top spot in the second half, a report by the United Nations Conference on Trade and Development (UNCTAD) said. Even if China’s stay at the top of the rankings proves brief, it underlines the shift in foreign investment flows that has occurred since the financial crisis hit developed economies in 2008. Foreign investment in developing economies matched flows to developed economies for the first time, the report said. U.N. data show that U.S. FDI inflows reached USD57.4 billion in the first half of this year, down from USD94.4 billion in last year’s period. China attracted USD59.1 billion in foreign investment in the first six months, down from USD60.9 billion in the year-earlier half. Early indications for the third and fourth quarters suggest the U.S. may claim the top position for 2012 as a whole, the U.N. report said, citing the recently announced USD20 billion acquisition of Sprint Nextel by Japan’s Softbank. The U.N. report estimates that global FDI flows will “at best” be unchanged at around USD1.6 trillion this year; in July, it had forecast a rise of 5%. Foreign investment in Russia dropped 39%. By contrast, FDI flows to Latin America rose 8% from the first half of 2011, while flows to Africa were up 5%, the Wall Street Journal reports.