A Tougher Stance on Financial Risk
This year China’s top banking regulator has scaled up its efforts to place financial markets under stricter scrutiny in order to better guard the sector against potential risks.
By the end of November, the China Banking Regulatory Commission (CBRC) had imposed administrative penalties relating to more than 2,500 cases involving irregularities within the sector, covering state-owned banks, joint-equity banks and city commercial banks, statistics from the Commercial Research Institute of Beijing Business Today showed.
The fines imposed on these banks totaled 592 million yuan ($89.5 million) in the first 10 months of this year, compared with 270 million yuan ($40.82 million) for all of 2016.
So far a total of 167,000 people have been held accountable for banking irregularities nationwide, 252 of whom have been transferred on to the appropriate judicial organs, CBRC data showed.
Instances of misconduct included bad assets, bond defaults, shadow banking, capital embezzlement and irregular inflow of loans or wealth management funds into the property sector.
“Risk control should be considered the top priority for the banking sector. But driven by profits and subject to a lack of supervision, some funding failed to flow into the real economy, and was instead used for illegal activities,” said Guo Tianyong, a professor with the Central University of Finance and Economics.
Since the prevention of financial risks was declared a priority at the annual Central Economic Work Conference last December, the CBRC has made a concerted effort to clean up the market.
Measures have included strengthening credit and liquidity risk control, enhancing bond investment business management, prevention of risks in the real estate sector and controls on the debt of local governments.
The CBRC has also tightened its regulation of banks’ wealth management products. China’s fast expanding wealth management industry is considered a source of financial risk, as off-balance-sheet wealth management products channel deposits into risky investments without adequate regulation.
Chinese authorities are also tightening their grip on Internet financing as part of the campaign to alleviate threats to the financial sector. Regulators ordered a ban on initial coin offering, whilst shutting down all virtual currency exchanges in the country. Unlicensed firms or individuals were also banned from providing cash loans and micro lending services.
Following these tough interventions, China has made progress toward controlling the risks in its banking sector, with declining interbank business and slower growth in wealth management products.
By the end of October, interbank assets and liabilities, which serve as major indicators for shadow-banking activities, had dropped by 3.4 trillion yuan ($514.05 billion) and 1.4 trillion yuan ($211.67 billion) respectively, from the beginning of this year. The growth in the value of wealth management products slowed to 4.7 percent, down 26.5 percentage points compared to the year before.
Interbank wealth management products recorded a net decrease of 2.7 trillion yuan ($408.21 billion) in the first 10 months of the year, while off-balance-sheet business growth slowed to 16.1 percent by the end of October from an annual rate of over 50 percent in the past few years.
The CBRC vowed to continue strengthening supervision and punishment for irregularities in order to enhance risk control measures and improve financial services for the country’s real economy.
“China’s financial supervision will become increasingly strict, with tougher punishment for market irregularities and imprudent operations,” said Wang Zhaoxing, Vice Chairman of the CBRC, at the annual meeting of China’s city commercial banks.
Wang asked city commercial banks to improve corporate management as a means to further control and address financial risks, especially liquidity risks, which are the largest threat to small and medium-sized banks, and could lead to systemic and regional threats.
In addition to this tough stance on market disorder, more efforts are required to foster a long-term mechanism of reform in the banking sector, said Guo.
China’s financial supervision needs to keep pace with new developments and emerging phenomena in the industry, with supervision rules updated accordingly and in a timely manner, Guo said.