Financial risk management addressed in Lujiazui Forum

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03:21

Financial institutions have to do self-checks to rein in financial risks, which is a long term task for China, officials and experts said at the 2018 Lujiazui Forum in Shanghai on Thursday.

“We need to consider the market's capability to take on risks and maintain healthy capital flows. On deleveraging drive, we have asked financial institutions to have self-checks before regulators step in to make it more efficient,” said Guo Shuqing, Chairman of China Banking and Insurance Regulatory Commission.

Starting in April last year, regulators began ramping up financial supervision, targeting excessive interbank lending as well as the shadow financing that has helped some lenders, especially small lenders, expand aggressively.

The measures are taking effect. Trust loans, entrusted loans and undiscounted bankers' acceptances, which are common forms of off-balance sheet shadow loans, showed a significant drop in May.

Experts point out that the extensive branch networks of larger lenders help them pull in depositors, which helps them buffer the effects of deleveraging. But smaller lenders are faced with rising borrowing costs, weakened profit growth and increased solvency risks.

“The large influence of the deleveraging process on small lenders is continuing. The whole process leads to a shrinking in both assets and liabilities. But the scaling down of liabilities is more obvious, as small lenders find it difficult to lure deposits,” said Lian Ping, the chief economist of Bank of Communications.

However, Lian pointed out that the central government has realized the difficulties small lenders are facing and is taking measures to help.

“The central bank has been continually lowering the reserve requirement ratio, and that amounts to more than 1 trillion RMB. In addition to that, the collateral for MLF loans has been expanded, and that will ease the problem of inefficient collateral for small- and medium-sized banks. You can see the government is aware of the pressures and is adjusting its regulation measures accordingly,” Lian added.

Meanwhile, China's banking and insurance regulator issued revised guidelines last month for commercial banks' liquidity risk management.

The regulations, which will take effect next month, divide commercial banks into two groups, those with assets over 200 billion yuan and those below, and different supervision approaches are set for each group.

Liu Ligang, Chief China Economist at Citigroup, pointed out that small- and medium-sized banks may have to look for strategic partnerships, and with China further opening its financial sector, foreign banks might be an option.

“We all know that at this moment foreign financial institutions now can have majority bank shares to fully own a bank. This also applies for brokerages, asset management and insurance companies,” Liu said.

Defaults on Chinese bonds have risen sharply this year. A total of 13 issuers have defaulted on 20 bonds so far this year, according to a recent report by China Central Depository & Clearing Company. The majority of defaulting issuers are private companies, which were most affected by the shrinking of non-standard financing.