Na­tion to strengthen reg­u­la­tory frame­work

China Daily (Latin America Weekly) - - Two Sessions - Jiangx­ue­qing@chi­

Strength­en­ing the reg­u­la­tory frame­work will re­main a key fo­cus for China’s bank­ing sec­tor this year, ac­cord­ing to econ­o­mists and an­a­lysts, who be­lieve more spe­cific rules will be in­tro­duced to place greater em­pha­sis on en­force­ment.

“We ex­pect more spe­cific reg­u­la­tions to be in­tro­duced this year to ei­ther fix loop­holes in the ex­ist­ing rules or lay out the reg­u­la­tory frame­work for ar­eas cur­rently not cov­ered, and fo­cus­ing on shadow bank­ing, credit al­lo­ca­tion, cor­po­rate gov­er­nance, con­sumer pro­tec­tion, cor­rup­tion, proper dis­clo­sure and other fac­tors,” wrote Wang Tao, chief China econ­o­mist at UBS Se­cu­ri­ties, in a re­cent re­port.

Since Novem­ber, the China Bank­ing Reg­u­la­tory Com­mis­sion has is­sued a num­ber of di­rec­tives to re­duce fi­nan­cial sec­tor lever­age, ad­dress non­com­pli­ant prac­tices and im­prove liq­uid­ity and risk man­age­ment.

Non­bank credit chan­nels, in­clud­ing trust and en­trust loans, are be­ing tight­ened along with non­stan­dard debt prod­ucts, while cash loan busi­nesses and in­ter­net pay­ment plat­forms will also face stricter rules, ac­cord­ing to the UBS re­port.

The tighter rules, along with the im­ple­men­ta­tion of reg­u­la­tions on as­set man­age­ment prod­ucts, should lead to con­tin­ued un­wind­ing of fi­nan­cial sec­tor lever­age, wealth man­age­ment prod­ucts and other busi­nesses in the sec­tor.

“We think the on­go­ing reg­u­la­tory tight­en­ing may have greater im­pact on the op­er­a­tions of re­gional banks than on larger ones in some cases, be­cause many smaller banks have weaker in­ter­nal con­trols and have been un­der rel­a­tively less scru­tiny,” Wang said.

“We be­lieve such rec­ti­fi­ca­tions will be in­di­rectly pos­i­tive for listed banks in the long run, by low­er­ing over­all risk within the fi­nan­cial sys­tem,” she added.

“We also be­lieve strength­ened reg­u­la­tion could help to ease in­vestors’ con­cerns about the longterm sus­tain­abil­ity of China’s bank­ing sec­tor, and will there­fore be sup­port­ive of val­u­a­tion re-rat­ing.”

Gov­ern­ment of­fi­cials have em­pha­sized that tight­en­ing reg­ula- tions in the fi­nan­cial sec­tor will re­main a pri­or­ity.

In an in­ter­view with Peo­ple’s Daily in Jan­uary, Guo Shuqing, chair­man of the China Bank­ing Reg­u­la­tory Com­mis­sion, said the war on fi­nan­cial risks will con­tinue this year, with re­newed ef­forts to crack down on shadow bank­ing ac­tiv­i­ties along with fur­ther rec­ti­fi­ca­tion of fi­nan­cial ir­reg­u­lar­i­ties.

“We need to fo­cus on low­er­ing cor­po­rate debt ra­tios, re­strict­ing house­hold debt, strictly stan­dard­iz­ing cross-sec­tor fi­nan­cial prod­ucts and con­tin­u­ing to dis­man­tle shadow bank­ing ac­tiv­i­ties,” he said.

In an ar­ti­cle posted on the Fitch Wire credit mar­ket com­men­tary page, Fitch Ratings said the lat­est reg­u­la­tory moves are “a step to­ward im­prov­ing trans­parency and ad­dress­ing the ad­e­quacy of banks’ risk-weight­ing and pro­vi­sion­ing lev­els” and are also “in keep­ing with ef­forts made since early 2017 to con­tain riskier types of lend­ing”.

The in­ter­na­tional credit rat­ing agency, which has dual head­quar­ters in Lon­don and New York, agreed with UBS that the com­mis­sion’s lat­est moves could help to con­tain the risks of con­ta­gion as­so­ci­ated with high in­ter­con­nec­tiv­ity, and ad­dress weak­nesses in gov­er­nance and trans­parency that weigh on the vi­a­bil­ity ratings of Chi­nese banks.

“The no­tices re­leased by the China Bank­ing Reg­u­la­tory Com­mis­sion ap­pear to take a more holis­tic reg­u­la­tory ap­proach that pushes banks to take a deeper look at their to­tal credit ex­po­sure and bet­ter ac­count for un­der­ly­ing risks,” Fitch said.

“Greater reg­u­la­tory scru­tiny could weaken banks’ prof­itabil­ity by lim­it­ing their busi­ness op­por­tu­ni­ties, forc­ing them to bring more lend­ing back onto their bal­ance sheets where it con­sumes cap­i­tal.”

Fitch added that there is ev­i­dence that in­ter­bank ac­tiv­ity and en­trusted in­vest­ment ex­po­sure are now con­tract­ing, al­though some of that may have mi­grated back into bank loans.

Ac­cord­ing to Guo, at the end of last year, both in­ter­bank as­sets and li­a­bil­i­ties fell for the first time since 2010.

In­ter­bank wealth man­age­ment has fallen by 3.4 trillion yuan ($539 bil­lion) since the be­gin­ning of last year.

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