China steps up banking oversight to prevent risks

BEIJING - China's top banking regulator has proved with actions that oversight in the banking sector will be tightened and regulatory standards will become stricter.

China Banking Regulatory Commission (CBRC) has fined the Chengdu branch of Shanghai Pudong Development Bank (SPD Bank) for 462 million yuan (about $72 million) for illegally covering up bad loans.

The SPD Bank branch was found to have offered credit worth 77.5 billion yuan to 1,493 bogus firms via illegal means in exchange for repayments from enterprises to cover non-performing loans.

The organized malpractice reveals poor internal regulation, a low sense of compliance and an excessive focus on business expansion, according to the CBRC.

This came after the 722-million-yuan fine imposed on China Guangfa Bank last month for offering illegal guarantees for defaulted corporate bonds.

The move signaled a continued hard stance from the government following a tough financial clean-up in 2017. The CBRC last year imposed nearly 3 billion yuan in fines on banking institutions and punished 270 individuals.

"China will step up the in-depth crackdown of the banking sector, while improving its regulatory regime in 2018," said Zeng Gang with the Institute of Finance and Business under the Chinese Academy of Social Sciences.

China has repeatedly vowed to clean up the disorder in its banking system, stressing that long-term efforts will be needed to control banking sector chaos.

"Banking shareholder management, corporate governance and risk control mechanisms are still relatively weak, and the root causes that create market chaos have not fundamentally changed," the CBRC said in a statement on its website.

The regulator said that violations in corporate governance, property loans and disposal of non-performing assets will be punished more strictly, and that it would strengthen risk control in interbank activities, financial products and off-balance sheet business.

"Bringing the banking sector under control will be long-term, arduous and complex," it said.

Meanwhile, supervision over the regulators is becoming significantly stricter as well.

While the head of the SPD Bank branch was banned from working in the banking sector for life, local banking regulatory officials and SPD Bank senior management were also punished for their negligence of duty.

In addition, the CBRC expects to optimize the market environment through stricter regulations so as to prompt steadier development in the banking sector to better serve the real economy.

More capital was redirected into the real economy as the financial sector saw constant leverage ratio drops in 2017, with over 100 banks offering to reduce their balance sheets, CBRC chairman Guo Shuqing said earlier in an interview with the People's Daily.

In 2018, the banking regulator will further support China's innovation-driven strategy by proceeding with inclusive financing and bringing down financial costs, said Guo.

While risks in the financial system are manageable, Guo warned against hidden dangers of "gray rhinos" and "black swans" in safeguarding China's financial stability.

"Shadow banking and cross-selling in financial services require urgent attention, as they are most likely to trigger financial risks within the system," according to Lian Ping, chief economist with Bank of Communications.

The tone-setting Central Economic Work Conference listed defusing major risks as one of the "three tough battles" the country will fight in the three years starting in 2018.

"We are sure that stricter banking oversight will provide solid support for winning the battle of preventing major financial risks," said Guo.