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Improvements to the regulation and supervision of China's banking system have won plaudits from the International Monetary Fund and World Bank, signaling lenders' strengthened ability to rein in potentially growing risks.
Led by the industry regulator, the China Banking Regulatory Commission, Chinese banks have made "significant improvements in risk measurement and risk management", based on high-quality capital and liquidity, said a report released by a team of experts from the IMF and World Bank.
The "CBRC is widely respected and has demonstrated its willingness to act in pursuit of its safety and soundness mandate", said the report.
"This report has significant reference value for improving China's banking system," said a statement from the People's Bank of China, the central bank, released on its website on Friday.
Suggestions from the IMF and World Bank can help accelerate the reform of the financial sector and improve the risk management framework to support stable and sound economic growth, the central bank's statement said.
The IMF and World Bank report said "it is on the right track with its reform agenda and needs to persevere in a sustained way in its current direction. It will need the full support of all other parties in the government to succeed in the goals it has set for itself".
However, complexities and risks are increasing along with further opening up and innovation in the country's financial market, which requires the top regulator to evolve quickly in the short term and get ready to meet the challenges, said the report.
Deloitte China, in a report issued on Thursday, said that commercial banks may face more risks from the increasing amount of non-performing loans this year amid the cooling property market and slowing economic expansion.
But the growth of bank loan risks will be "fundamentally under control" and it is unlikely to lead to the collapse of local governments' financing platforms, said Wang Pengcheng, co-leader of Deloitte Global Financial Services Industry.
The IMF and World Bank report said that "the framework of laws and guidance" in the Chinese banking sector's risk management system "is generally of high quality, but much of it is relatively recent. Implementation by banks needs to be improved".
Michael Werner, a senior researcher in China with Sanford Bernstein & Co, said the Chinese government has the capacity to give policy support to avoid a financial crisis.
"The problem of non-performing loans may not be as serious as people thought," Werner said, who predicted that the bad debt ratio may rise to 2.5 percent this year, compared with 1 percent at the end of 2011.
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