Regulatory supervision needs to be stepped up

A worker at the construction site of the Fuzhou-Pingtan railway and highway bridge in Fujian province. The Financial and Economic Affairs Committee of the National People's Congress has called on authorities to control risks with local government financing platforms. [Photo/China Daily]

Financial risks becoming complex, elusive, contagious, say lawmakers

Financial regulators must step up their oversight of the banking system to keep rising credit and liquidity risks under control, amid slower economic growth in China, top policymakers said on Tuesday.

"Financial risks are getting more complex, elusive and contagious, with risks in some areas becoming prominent," the Financial and Economic Affairs Committee of the National People's Congress, the top legislative body, said in a statement, after hearing a report from the State Council, the cabinet, on financial regulation.

Most of China's financial risks are centered in the banking system, as the industry's 159.5 trillion yuan ($25.7 trillion) of assets accounts for 90 percent of the country's entire financial industry, said the committee. But the committee said that the overall financial risks are still "controllable".

Bad loans of Chinese lenders have risen for 10 consecutive quarters, and stood at 1.28 trillion yuan at the end of April, according to data provided by the China Banking Regulatory Commission.

The property sector, which accounts for around 15 percent of Chinese economic output and directly affects about 40 other business sectors, is one of the key areas where credit risks lie, alongside local government financing platforms and industries like steel, shipbuilding and solar energy which face overcapacity issues, the committee said.

Last week, the National Bureau of Statistics said that average home prices in China fell for the first time in two years on a month-on-month basis in May.

"It's unclear where the property market is heading ... many developers are cash-strapped and credit risks have risen," said the committee.

By the end of March, loans to the property sector stood at 15.42 trillion yuan, up 18.8 percent year-on-year.

The lawmakers' warnings came after the economy grew 7.4 percent in the first quarter, the slowest pace in 18 months.

Economic activities remained sluggish in the second quarter, before rebounding a tad in June, as indicated by an unofficial measurement of manufacturing activities.

The flash manufacturing Purchasing Managers Index for June, issued by HSBC Holdings Plc on Monday, rose sharply to 50.8 percent, showing the first reading of above 50 percent, the line dividing expansion and contraction, this year,

"China is not out of the woods yet," Dariusz Kowalczyk, a Hong Kong-based economist with French retail banking group Credit Agricole CIB, said in a research note on Tuesday. "Continued downturn in the real estate sector remains a drag on the economy and a downside risk for achieving the government's development targets."

He expects the economy to grow by 7.3 percent in the second quarter, 0.2 percentage points lower than Beijing's full-year target of 7.5 percent.

The recent high-profile defaults in the bond market have also increased credit risks for lenders, the biggest bond-holders in China, said the committee.

At least two defaults followed after China saw its first domestic bond default in March, when Shanghai Chaori Solar Energy Science & Technology Co failed to repay most of its interest payments.

"Risks are getting increasingly bigger for some bonds to default, or even trigger a default outbreak," said the committee.

It said that lenders are also seeing higher liquidity risks as their mid- to long-term loans are rising just as deposit growth slowed.

There is a worrisome maturity mismatch, it said, as lenders use short-term funding—60 percent of which has a maturity of less than six months—to fund long-term assets. The mismatch was widely considered to have caused the unprecedented money market credit crunch last June that saw some short-term rates rise to a staggering 30 percent.

"The financial risks have been concentrated in the banking sector, as more corporates and local governments turned to indirect financing," said Australia and New Zealand Banking Group Ltd, in a note on Tuesday.

The bank added that China's overall financial risks are still "manageable" as the country's overall liability-to-asset ratio stands at 45 to 50 percent, still below the critical level of 60 percent.