China's Banking Regulator Urges Structural Reforms

BEIJING, Oct. 25 -- One of China's top banking regulators has called upon the nation's commercial lenders to improve their balance sheets and reduce excessive reliance on lending for profits.

Wang Zhaoxing, deputy chairman of the China Banking Regulatory Commission(CBRC), said banks should not seek excessive profits from a rapid increase in loans and a widening gap between lending and deposit rates, which is unsustainable.

Chinese banks went on a lending spree in 2009 in response to the urging of the government as part of the 4-trillion-yuan (601 billion U.S. dollars) stimulus package to ward off the effects of the global financial crisis.

Also, nearly 9.6 trillion yuan in new loans last year fuelled fears of banks distributing bad loans.

Many banks continue to depend upon issuing credit to government-backed projects to secure profits, Wang said at an industry meeting Thursday. However, those projects often lack adequate risk management.

Further, Wang urged lenders to improve balance sheets and the quality of assets, as well as the ability to manage risk aversion.

Chinese banking and financial institutions reported net profits of 668.4 billion yuan last year, of which a lion's share came from the gap between deposit and lending rates, investment proceeds and fees, according to the report on China's banking industry issued by the CBRC in July.

The report noted that the average capital adequacy ratio stood at 11.4 percent at the end of last year, above the international safety line, while the non-performing loan (NPL) ratio fell to 1.58 percent, down 0.84 percentage points from the level at the beginning of 2009.

Despite the improved data, CBRC chairman Liu Mingkang has repeated warnings that an NPL rebound could bring with it risks from lending to local government financing platforms and the property sector which has accumulated asset bubbles.

At the meeting, Wang said the CBRC would enhance oversight to assure unscrupulous and unhealthy financial institutions are phased out of the market.

Also, China will gradually move towards a market-driven interest rate mechanism, which would ultimately squeeze bank profits.