Strengthening the regulatory framework will remain a key focus for China’s banking sector this year, according to economists and analysts, who believe more specific rules will be introduced to place greater emphasis on enforcement.
“We expect more specific regulations to be introduced this year to either fix loopholes in the existing rules or lay out the regulatory framework for areas currently not covered, and focusing on shadow banking, credit allocation, corporate governance, consumer protection, corruption, proper disclosure and other factors,” wrote Wang Tao, chief China economist at UBS Securities, in a recent report.
Since November, the China Banking Regulatory Commission has issued a number of directives to reduce financial sector leverage, address noncompliant practices and improve liquidity and risk management.
Nonbank credit channels, including trust and entrust loans, are being tightened along with nonstandard debt products, while cash loan businesses and internet payment platforms will also face stricter rules, according to the UBS report.
The tighter rules, along with the implementation of regulations on asset management products, should lead to continued unwinding of financial sector leverage, wealth management products and other businesses in the sector.
“We think the ongoing regulatory tightening may have greater impact on the operations of regional banks than on larger ones in some cases, because many smaller banks have weaker internal controls and have been under relatively less scrutiny,” Wang said.
“We believe such rectifications will be indirectly positive for listed banks in the long run, by lowering overall risk within the financial system,” she added.
“We also believe strengthened regulation could help to ease investors’ concerns about the long-term sustainability of China’s banking sector, and will therefore be supportive of valuation re-rating.”
Government officials have emphasized that tightening regulations in the financial sector will remain a priority.
In an interview with People’s Daily in January, Guo Shuqing, chairman of the China Banking Regulatory Commission, said the war on financial risks will continue this year, with renewed efforts to crack down on shadow banking activities along with further rectification of financial irregularities.
“We need to focus on lowering corporate debt ratios, restricting household debt, strictly standardizing cross-sector financial products and continuing to dismantle shadow banking activities,” he said.
In an article posted on the Fitch Wire credit market commentary page, Fitch Ratings said the latest regulatory moves are “a step toward improving transparency and addressing the adequacy of banks’ risk-weighting and provisioning levels” and are also “in keeping with efforts made since early 2017 to contain riskier types of lending”.
The international credit rating agency, which has dual headquarters in London and New York, agreed with UBS that the commission’s latest moves could help to contain the risks of contagion associated with high interconnectivity, and address weaknesses in governance and transparency that weigh on the viability ratings of Chinese banks.
“The notices released by the China Banking Regulatory Commission appear to take a more holistic regulatory approach that pushes banks to take a deeper look at their total credit exposure and better account for underlying risks,” Fitch said.
“Greater regulatory scrutiny could weaken banks’ profitability by limiting their business opportunities, forcing them to bring more lending back onto their balance sheets where it consumes capital.”
Fitch added that there is evidence that interbank activity and entrusted investment exposure are now contracting, although some of that may have migrated back into bank loans.
According to Guo, at the end of last year, both interbank assets and liabilities fell for the first time since 2010.
Interbank wealth management has fallen by 3.4 trillion yuan ($539 billion) since the beginning of last year.