Bad loans to property developers at Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China increased by 500 million yuan (HK$479.9 million) in the first quarter to 70.8 billion yuan, representing 10.1 percent of total property lending, the People's Bank of China said Tuesday in a statement.

China started imposing curbs on property projects in April 2003 to try to slow an economy that has grown at an average annual pace of 8.6 percent for the past decade. Operating profit at the nation's biggest banks slowed in the first half and analysts say the property-related bad loans may increase.

"This is a time bomb that may explode at any time if the government takes further measures to prick the bubble,'' said Wu Yonggang, a Shanghai-based banking analyst at Guotai Junan Securities. "Chinese banks' exposure to real estate and construction lending accounted for about a fifth of their loans.''

The central government has stepped up efforts to boost capital, lower bad loans and weed out corruption at its biggest lenders so they can compete with overseas rivals such as HSBC Holdings and Citigroup. China wants to strengthen local banks before the country opens its banking industry to more foreign competition after 2006.

Agricultural Bank of China, the nation's fourth-biggest lender, had the highest bad-loan ratio on property lending at 16.2 percent, while bigger rival Bank of China posted a 12.3 percent ratio.

China last year expanded the policy of restricting lending to certain industries to include steel, cement, aluminum and other companies.

To avoid a new batch of soured loans amid soaring house prices, the government on March 16 allowed domestic lenders to increase down payments and the minimum interest rate on property lending. Real estate loans may climb by 20 percent, or 500 yuan, to 3.1 trillion yuan by the end of this year, down from 22.8 percent growth in 2004, the central bank forecast.

China's home prices rose 13.6 percent from a year earlier in the first four months of this year, little changed from the first quarter, the National Bureau of Statistics said on May 20. The rate of growth has slowed from 15.2 percent last year.

Average housing prices in Shanghai, China's commercial capital, fell in July after almost tripling since 2002. Investment in the city's real estate market jumped 30 percent to 117.6 billion yuan last year, the central bank said in a report on May 25.

House prices in Shanghai fell 2.7 percent in July from a month earlier, according to the Shanghai Property Exchange Center. A decline in Shanghai's property market, which accounts for about one-fifth of China's residential property sales, could have a significant impact on national property prices and the economy, Credit Suisse First Boston said in a report in May.

The four state commercial banks cut their combined bad loans to 1.01 trillion yuan at the end of June, after the government bailouts and 458 billion yuan of bad loans were transferred to asset management companies. The Big Four's total bad-loan ratio is currently 10.12 percent. Property developers received as much as 55 percent of their investment capital from bank loans, the central bank said Tuesday. Industrial Bank, Construction Bank and Bank of China have received a combined US$60 billion (HK$468 billion) in government bailouts since December 2003 to help them reduce bad loans in preparation for international initial public offerings.

Industrial Bank, Bank of China and Agricultural Bank all reported slower growth in operating profit in the first half as banks curbed lending.

The Bank of China's operating profit rose 11.6 percent to 36.7 billion yuan in the six months to June 30 compared with a gain of 16 percent a year earlier.

BLOOMBERG