Foreign banks have been urged to enhance their risk management strategies, as many lenders in the city have ineffective risk control.

In a press release issued yesterday, the Shanghai branch of the China Banking Regulatory Commission said that recent inspections of foreign banks found they had failed to "localize" risk management.

"As the market continues to open, foreign lenders in Shanghai witnessed a fast development in RMB business," the release said, adding that risk exposure is growing.

"It's particularly outstanding that most foreign lenders have yet to set up departments for market risk management in China," it said. "And monitoring and controls for personnel risk is mainly based overseas.

"Personnel who have spent years  working abroad are not familiar with the Chinese market and are unaware of the transaction environment, and Chinese business culture."

To bring market risks under effective control and ensure their healthy and steady development, local authorities are demanding foreign players in Shanghai perfect their risk control measures and gradually localize their risk management functions.

"Foreign banks should establish independent and effective risk control departments in China, with sufficient and competent risk-control personnel supervising their RMB operations," the release said.

Foreign lenders will also be required to evaluate their risk exposure and profits and losses more accurately, providing reliable information and data for authorities to better control market risks.

Local authorities said they had been keeping a close eye on risk control because foreign lenders, with fresh technologies and methods, need a period of examination and correction when they land in a new market.

Ahead of its market-opening schedule required by World Trade Organization (WTO) commitments, China has granted foreign lenders more freedom in the local currency business.

Foreign banks like Europe's biggest lender HSBC have been able to offer RMB business to Chinese and foreign businesses and foreign individuals in a total of 25 cities.

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