BUSINESS China to tighten bank controls in face of high leverage ratios and trade row with the US

BUSINESS

China to tighten bank controls in face of high leverage ratios and trade row with the US

Global Times

02:36, August 24, 2018

0b00043a-f597-4757-a930-2b8f9592619a.jpeg

A service robot interacts with customers at a bank in Huzhou, East China's Zhejiang Province. (Photo: VCG)

Chinese regulators will deploy strengthened regulation and strict controls to fend off serious risks in the Chinese banking sector, given the already-high leverage ratio and challenging global environment, officials and experts said on Thursday.

Because of the high debt level, monetary tightening in developed economies and uncertainties from the ongoing trade tension, the Chinese banking sector could face significant exposure to bad assets and may require broad measures to address risks, officials and experts noted.

"Under the constraints of the external and internal environment, it is difficult for China to conduct further monetary expansion, and tight regulation and strict controls will become a new normal," Yu Xuejun, an official with the China Banking Insurance Regulatory Commission (CBIR), told a forum on Thursday, according to financial news website yicai.com.

Pointing to the trade spat between China and the US, monetary tightening in developed economies as well as domestic "problems," Yu, who heads a CBIR supervisory board on major State-owned financial institutions, said that the Chinese banking sector is in an "unprecedentedly" complex situation.

"China's banking sector may face a new round of huge exposure to bad assets," he noted, adding that the trade tension between China and the US could prompt changes in many aspects, not only between China and the US but in the entire global trade environment.

In a sign of further escalation, US tariffs on $16 billion worth of Chinese goods took effect on Thursday. This prompted an immediate response from China, which also imposed tariffs on US goods worth $16 billion.

Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, said that the trade tension is unlikely to have any short-term direct impact on the Chinese banking sector. But it might "create a situation in which risks that already exist in the banking industry could be exacerbated," he warned.

"If we are in a 'war,' we must be prepared and cannot allow any problems at home," Dong told the Global Times, adding that "serious actions" are needed to crack down on illegal activities in the banking sector, because leverage ratios are at an "alarming level." 

Deleveraging drive

Zhang Jianhua, president of Huaxia Bank Co, said that China's leverage ratio has reached a point where it has to be dealt with or it could pose serious risks to the Chinese economy.

"Leverage has reached a point where, if we encounter a hard landing, I am afraid there will be problems with the economy," Zhang told the same forum on Thursday, according to news website sina.com. He pointed out that the Chinese banking sector's leverage ratio has surpassed that of Japan and Germany, which have similar inter-banking financing structures to China.

Zhang said that to avoid a hard landing, China has to take actions to deleverage, including debt-equity swap programs. But he noted that such programs should be market-oriented and banks should be "cautious" in choosing buyers of debt.

"Reducing the high leverage in the banking sector is certainly the key to fending off systemic financial risks and China has already started the process," Li Daxiao, chief economist at Shenzhen-based Yingda Securities, pointed out. "However, we need broader reforms to ensure long-term development of the banking industry."

Dong said that cracking down on "speculative" actions that raise leverage is necessary in the immediate future because "many people are still used to the time when there was no limit on borrowing and they always want to look for different ways to continue that. This needs to be severely punished," he said.

Related Stories

Terms of Service & Privacy Policy

We have updated our privacy policy to comply with the latest laws and regulations. The updated policy explains the mechanism of how we collect and treat your personal data. You can learn more about the rights you have by reading our terms of service. Please read them carefully. By clicking AGREE, you indicate that you have read and agreed to our privacy policies

Agree and continue