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Test of bank reforms 2006-07-17 08:18:53

Related: Official warns investment risk in power, coal, steel, housing industry

    BEIJING, July 17 -- China Banking Regulatory Commission Chairman Liu Mingkang's call for Chinese banks to caution against investments risks in specific industries forms a major part of the government's effort to further tighten credit. It is also a warning that domestic banks should brace themselves for a major test after their market-oriented reforms.

    With the smooth initial public offering of Bank of China in the Hong Kong and Shanghai stock markets over the past two months, the country is set to successfully wrap up the first phase of its banking reform. Three of the four major State-owned commercial banks will get listed by the end of this year. Such listing is widely believed crucial to the improvement of Chinese banks' management and corporate governance.

    The Chinese economy's robust growth offers domestic banks a rare opportunity to pursue rapid growth while deepening their reforms. However, this year's unexpected growth in bank loans not only fuelled the strong overall growth of the national economy, it also caused concerns about the actual progress of domestic banks' reforms.

    The success of China's banking reforms will ultimately be decided by whether Chinese banks can withstand a boom-bust economic cycle in the same way as commercial lenders.

    Unfortunately, the performance of most Chinese banks indicates no significantly improved awareness of risk management.

    Latest statistics show that in the first half of this year, the country's outstanding bank loans rocketed by 2.18 trillion yuan (US$273 billion) to 21.53 trillion yuan (US$2.7 trillion). The increase in new loans accounted for 80 per cent of the central bank's full-year loan target.

    As a result of a number of moves taken by the central bank to rein in excessive lending and cool down the economy, the growth of local currency loans slowed last month. New bank loans totalled 360 billion yuan (US$45 billion) in June, 102.7 billion yuan (US$12.8 billion) less than during the same period last year. But even that year-on-year decline cannot prevent domestic banks from meeting the full-year target very soon.

    Amid growing expectations of a rise in interest rates to slow economic growth, the banking regulator's warning against lending to the power, coal, steel, real estate, auto and transportation industries can surely be interpreted as an effort to tighten credit with tools other than interest rates. This move confirmed both the severity of the problem of excessive liquidity and the authorities desire to take action to counter it.

    Bearing in mind the problems resulting from overcapacity and structural adjustment in a number of industries, banks should take the regulator's warning about credit risks very seriously.

    When the country is enjoying a boom, it is understandable and easy for Chinese banks to lend as much as possible to seek more profits in order to beautify their balance sheets. But risk management is vital to the long-term growth of any prudent financial institution. To survive boom-bust cycles, commercial banks should learn to reduce their exposure to potential bad loans resulting from excessive lending during an economic upswing.

    In the past, Chinese banks were bailed out by the government after accumulating large amount of bad loans through the country's economic cycles. The ongoing banking reform should aim to enable domestic banks to withstand such risks by standing on their own feet.

(Source: China Daily)

Editor: Yao Runping
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