Chinese banks are seen as stable, despite the expected rise in bad loans, because of positive factors underpinning the banking system, Moody's said yesterday.

In its "China Banking System Outlook" report, the rating agency said China's soft landing, the banks' solid capital and strong deposit base will ensure stability even if there is a modest deterioration in the asset quality due to a rise in non-performing loans as loans given out during the credit boom of 2009 and 2010 come due.

Moody's also expected continued cuts in the required reserve ratio and the use of open market operations by the central bank to assure there is sufficient liquidity in the banking system and a stable interest rate environment. It expected Chinese banks to extend up to 8 trillion yuan (US$1.27 trillion) in new loans this year, up from 7.5 trillion yuan in 2011.

Deloitte's view on China's banking industry is similar. In a report earlier this month, Deloitte said the NPL ratio may increase but won't pose a great risk to the system.