Banks advised to keep close watch on risk

Enhancing risk controls and ratings for local treasury bonds will be one of the most important goals for banks in 2014, the chairman of the China Banking Regulatory Commission said on Tuesday.

The amount of the bonds issued by local governments must also be curbed next year, said Shang Fulin, the chairman of the CBRC.

"Banks must keep a close watch on credit risks and use innovative financial instruments to leverage the existing capital," said a press release published on the commission's website.

The total value of local government bonds was about 3.58 trillion yuan ($589 billion) at the end of 2012, of which 78.07 percent had been funded by bank loans, according to National Audit Office data. That means that banks held more than 3 trillion yuan of local government debt by the end of last year.

If the ratio of nonperforming loans in the local financing platform increases to 30 percent this year, the overall NPL ratio in the banking industry will increase from 1.16 percent in the middle of the year to 3.9 percent by the end of the year, said a report by BOC International (China) Ltd.

The central government has prioritized the goal of limiting the risks of local government bonds next year, said Song Nan, an analyst at China Galaxy Securities Co Ltd. The goal has been listed as the third most important of the key economic tasks for 2014.

"Give priority to controlling and dissolving the risks of local treasury bonds. Tighten up the procedures for local governments to borrow from banks," said the guidelines released by the Central Economic Work Conference, which ended on Dec 13. The event is an annual meeting that gathers the country's top leaders to review the economy in the previous year and map out plans for the coming year.

"The supply of local bonds is expected to shrink and the deleveraging process will continue," said Song. "The restrictions will put a lid on the bonds of city investment companies, which serve as a major financing platform for local governments."

Lian Ping, chief economist at the Bank of Communications Co Ltd, said that the pressure of local treasury bonds, though not to be neglected, is unlikely to trigger systemic risks for commercial banks.

"Moreover, governments throughout the country are in great need of financial resources due to the acceleration of the urbanization drive. The risks are well under control," said Lian.

The CBRC also called for stricter risk controls for real estate loans and shadow-banking activities.

Shang said that the commission needs to release detailed plans and policies to regulate the entry of private capital in the country's banking industry.

"Encourage private capital to establish small and mid-sized banks, consumer finance companies, financial leasing companies, and other financial institutes," said Shang.

More than 40 private companies have filed applications to set up private banks, and more than 30 private banks have already gained approvals from the State Administration of Industry and Commerce.

These private banks mainly fall into two categories: those launched by a group of listed companies and those co-founded by a group of companies in the same sector. The country's first private bank will likely be officially launched in early 2014.

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