Chinese banks are weak in risk controls
Updated: 2006-06-30 07:12
It is an incontrovertible fact that all banks in China are facing surging
credit demand, which has made the People's Bank of China and the State Council
give repeated orders to banks to strictly control their new loan issuance.
International credit rating agency Standard & Poor's (SP) released a
research report that warns of the speedy growth of credit increasingly weakening
China's banking sector.
SP Greater China financial service rating director Ryan Tsang stated that
although Chinese banks largely use commercial principles in their banking
operations, their unsound credit and risk management systems and practices will
plunge the banks into severe shocks in case of sharp changes in the economic
environment since industrial and commercial enterprises are too heavily indebted
to the banking sector. Should economic growth slow down and corporate profit
margins shrink, it would be a huge challenge to collect these loans.
SP observed that if China witnesses a rapid rise in its interest rates or
accelerating appreciation of its currency, the banking system that relies on
credit revenue will undergo tremendous pressure. SP's pressure test shows that
in the case of the RMB appreciating by 25% and interest rate rises 2 percentage
points, the net profits of Chinese firms are likely to drop 34% and the banking
sector will see a 9-percentage-point increase in its bad loan ratio, namely more
than 1.7 trillion Yuan (US$212.5 billion) of bad debt, if no countermeasures are
SP admits on the other hand this situation is not likely to happen.
Nonetheless China's banking sector should indeed improve its capability rapidly
and develop relevant products to handle such risks.