Oct. 27 (Bloomberg) -- China's banks reduced their average bad-loan ratio to 5.49 percent by the end of September as the industry enhanced risk controls, the nation's regulator said today.

Banks had a total of 1.27 trillion yuan ($186 billion) of non-performing loans as of Sept. 30, down 3 billion yuan from the end of June, the China Banking Regulatory Commission said in a statement on its Web site. The bad-loan ratio at those banks was 6.3 percent at the end of March.

Chinese banks have improved risk management and internal controls and strengthened their capital positions after becoming publicly traded since 2005. Banks face their ``first real test'' as a worsening global financial crisis and slower domestic economic growth may cause more loan defaults, according to Fitch Ratings.

About half of China's toymakers have shut down this year, with 7,000 workers losing their jobs when Smart Union Group Holdings Ltd. closed factories in Guangdong province this month, state-owned Xinhua news agency reported. A quarter of 70,000 Hong Kong-owned businesses in the Pearl River Delta may go bust, the Federation of Hong Kong Industries estimated this month.

China's six largest publicly traded banks may report a 20 percent increase in soured debt in 2009, according to BNP Paribas SA's estimate.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd., Agricultural Bank of China and Bank of Communications Ltd., the nation's five- largest lenders, had 1.11 billion yuan of bad loans as of Sept. 30, representing 7.35 percent of their total advances, according to today's statement. Smaller national lenders, known as joint- stock banks, had a bad loan ratio of 1.59 percent, while city banks had 2.54 percent of their lending unpaid.

The banking industry boosted its assets by 17.2 percent to 59.3 trillion yuan by September, the regulator said in a separate statement today.

To contact the reporter on this story: Luo Jun in Shanghai at jluo@bloomberg.net

Last Updated: October 26, 2008 23:37 EDT