China’s main bank regulator has warned that serious risks are building up in the financial sector and specifically linked improving financial risk management to the "important task” of maintaining social stability in the country.
The comments from Liu Mingkang, chairman of the China Banking Regulatory Commission, contrasted with the bullish outlook presented by most state-controlled banks in their interim reports in recent weeks .
The banks mostly dismissed concerns about risks building up on their balance sheets following an unprecedented credit boom over the last two years.
Mr Liu said financial institutions needed to improve the design, implementation and application of “stress tests” conducted recently to assess how vulnerable they are to a downturn in the economy or a crash in the property market
"The risk management system in the Chinese banking sector still has many weaknesses,” Mr Liu said in comments published Wednesday. “We must not ignore the hidden systemic risks and dangers.”
He said improved capital and risk management in the banking sector was crucial to maintaining the two “important tasks” of economic growth and ensuring social stability.
The CBRC has ordered lenders to conduct regular stress tests on an array of business lines since last year, in one case requiring them to predict the impact on their balance sheets and operations in the event of a 60 per cent fall in house prices in major cities.
Banks have made sanguine comments about the results, saying their bad loan ratios would only rise by a small amount in such an event but analysts have raised doubts about the accuracy of these results.
Bank of Communications, the country’s fifth largest lender by assets, said last month that if real estate prices in major cities fell by 50 per cent its non-performing loan ratio would only increase by 1.2 percentage points.
The news was greeted with disbelief from many analysts and senior Chinese bankers told the FT they had since been ordered by the regulator not to disclose the detailed results of their stress tests to the public.
After a lending spree that some economists have called the greatest financial and monetary easing in history, China’s banks are currently raising hundreds of billions of renminbi to shore up their balance sheets.
In his comments on Wednesday, Mr Liu said the banks urgently needed to switch their focus to the quality of their loans, rather than the quantity.
That statement echoed sentiments expressed in a recent editorial by the chairman of Bank of China, Xiao Gang, who criticised the “irrational expansion” of banks’ business.
"Growing big is the best way for Chinese banks to make more money under the current financial environment,” Mr Xiao wrote. “This model of growth, however, neither assures the long-term sustainable development of the banking sector nor satisfies the need of a balanced economic and social structure.”
