China makes progress in restoring order to banking sector

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China has achieved positive results in its efforts to crack down on the country's illicit banking sector, the banking watchdog said on Friday.

"Like pulling an ox by its nose, we are able to address the core issues in the banking sector, namely the interbank, wealth management products, and off-balance sheet businesses," said Xiao Yuanqi, the chief of the prudential regulation bureau of the China Banking Regulatory Commission (CBRC) in a press briefing.

In the second quarter, outstanding interbank assets and liabilities shrank for the first time since 2010, Xiao noted.

Interbank assets and liabilities dropped by 1.8 trillion yuan (269.64 billion US dollars) in the first half this year.

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Authorities started curbing negotiable certificates of deposit (NCDs), a popular short-term debt instrument for smaller banks in interbank market, early this year, following a bond-market rout in December.

The People's Bank of China (PBOC) will begin including NCDs in its quarterly macro-prudential assessment (MPA) as of the first quarter of 2018.

The total balance of Chinese banks' wealth management products decreased to 28.4 trillion yuan as of June 30 from 29.1 trillion yuan at the end of 2016.

The PBOC has increased scrutiny on banks' off-balance sheet wealth management products, a key component of shadow banking credit, while the banking regulator has stepped up a crackdown on risky lending behavior.

In 2015, over half of the WMP funds were invested in the bond market. Some money managers then used the bonds as collateral to borrow short-term money via the repo market to buy more bonds. By repeating this game, bond markets would be heavily leveraged and lead to excessive risk.

Regulator encourages disposal of bad loans

The CBRC is encouraging banks to speed up disposal of non-performing loans (NPLs) and will maintain its push for asset-backed securitization of NPLs, said Xu Jieqin, vice chief of the policy research bureau.

It will also go ahead with a creditor committee system to tackle the corporate debt problem and encourage banks to conduct debt restructuring of companies facing temporary difficulties and support banks to conduct debt-for-equity swaps, Xu noted.

China's commercial banks reported higher first-half profits, while overall non-performing loans in June did not increase from March, the banking regulator said on Monday.

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