Closer scrutiny a cure for ailing banking sector

By Lao Lee Source:Global Times Published: 2017/8/1 21:08:40

Illustration: Peter C. Espina/GT

Debt extended by Chinese banks continues to bulge, subjecting housing and stock markets to outsize volatility. This indicates that long-running concerns over China's sprawling banking sector have not been placated. Investors both within and outside China need to double their focus on and scrutiny of the country's banking system.

China's banking industry is faced with the rising challenges of slipping capital adequacy and weakening ability to turn a good profit, as competition becomes fiercer with as many as 20 new upstart banks getting operation licenses annually.

New banks, both State-run and privately-owned, are springing up like bamboo shoots in China. Their birth is believed to foster a well-fortified financial services sector to back up faster local economic growth.

To attract public and private savings, these bankers have jostled to dangle higher saving rates, seriously denting their profit margins and making them vulnerable if macro-economic conditions go awry.

On top of that, Chinese banks have sold a wide variety of wealth management products worth more than 29 trillion yuan ($4.31 trillion), accounting for 16 percent of Chinese banks' aggregate debts. To make things worse, the banks' so-called wealth management products (WMPs) are often sold at annualized payment rates of over 5 percent. Some small banks are pledging rates as lofty as 6 percent, and Internet financing organs are even promising rates as high as 7 percent - several times higher than the official one-year deposit rate of 1.75 percent, which is set by the People's Bank of China, the central bank.

Pundits have pointed out the perilous hidden risks with the massive WMPs. To some extent, risks have become so increasingly interconnected among banks' many financial products that failure in one product could cause a system-wide failure.

Another challenge crippling the banks' health is soaring overdue loans, which, if not promptly resolved, might endanger the lenders' capital adequacy.

Starting from the second half of 2016, authorities in Beijing quickened the pace of listing more urban and rural commercial banks on the country's stock markets. To date, in total 37 banks are listed in the A-share and H-share markets, raising hundreds of billions of yuan in funds to replenish the banks' capital delinquencies.

The sickly banking sector should undoubtedly come under closer scrutiny in order to restore its health.

Moving in the right direction, government's regulators have lately cited reducing growing risk in China's financial system as a top priority in the second half of 2017.

It thus makes sense for all commercial banks to be asked to look closely at the books of their borrowers, especially those trying to make huge acquisitions abroad. A dozen well-known Chinese companies, including Dalian Wanda, Anbang Insurance, Fosun Group and HNA Group, have been called upon to check their balance sheets closely.

In a related development, Moody's said in late July that Chinese banks' overall delinquency rates "will stabilize" as corporate profit continues to recover, helped by stable and solid economic growth, steady commodity prices and the central government's strong efforts to lower banking and corporate leverage.

The global rating agency noted that the Chinese government remains a key shareholder of the commercial banks in China and would most likely continue to support them in "times of stress," and that support would cushion any potential crisis.

Particularly worth noting is the country's decision in middle of July to phase in a new institution - the Financial Stability and Development Committee under the State Council - to ratchet up financial oversight. The new committee, exemplifying the authorities' resolution to improve financial regulation and manage mounting risks, is far-sighted and commendable, instilling hope of the ultimate cure for the country's ailing banking system.

The author is an editor with the Global Times.

Posted in: INSIDER'S EYE

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