CBRC’s steps may cut banks’ risk exposures

Rising local government debts pose risks to China's banking sector although the regulator's recent measures may partially help trim risk exposures and improve the sector's transparency, Moody's Investors Service said yesterday.

China's local government debts jumped 67 percent from December 2010 to 17.9 trillion yuan (US$3 trillion) last June, accounting for 32 percent of the nation's gross domestic product, the National Audit Office said earlier.

Banks like the Bank of Communications and China CITIC Bank face more risks as they have a relatively higher exposure to the loans made to the local government financing vehicles.

The banks in general also seem to be indirectly exposed to non-bank financing tools, such as trust products.

Last week the China Banking Regulatory Commission unveiled measures to tighten control of the shadow banking system. These measures are credit positive for banks because they will reduce the banks' risk exposure to other banks and non-bank financial institutions, Moody's said.

The measures bar banks from repackaging loans as wealth management products sold to customers, including other financial institutions.

The CBRC also demanded last week that China's 'too-big-to-fail banks' and banks with total assets above 1.6 trillion yuan have to make regular disclosures. The new requirement will improve the transparency of Chinese banks, according to Moody's.