Chinese banking system remains one of the weakest in the world, despite some improvements in the financial performance of its lenders, Fitch Ratings said on June 07.
"All Chinese banks, to varying degrees, continue to demonstrate thin profit margins, relatively low capital, weak asset quality, and underdeveloped risk management systems," the global ratings service said in a statement.
Chinese banks have made impressive strides recently, but widespread corruption and ineffectual corporate governance, underdeveloped risk management and internal control systems, remain key weaknesses, it said.
Fitch also gave a mixed report card on the ongoing reforms in the sector, which have included efforts to reduce non-performing loans and a tightening of credit standards, as well as improvements in accounting methods and transparency.
China's larger, premier banks have clearly benefited from the changes but weaknesses at other institutions remain largely unaddressed, while incomplete accounting and legal frameworks continue to hold back the sector.
Deeper, more comprehensive reforms - including improvements in the supporting financial infrastructure and a resolution of the government and Communist Party's role in the financial system - will be necessary to improve overall systemic risk, it said.
Apart from credit risk, Fitch said the sector's exposure to market risk was also on the rise.
This is because Beijing is pursuing further liberalisation of exchange rates and interest rates, while long-standing controls on capital outflows are being relaxed.
As such, the banking industry risk is one of the largest vulnerabilities facing the Chinese economy, it said.