Chinese banks are in the best shape ever, but they face a rougher ride in 2009 as the economy turns down, a senior financial regulator said on Saturday. "Domestically, as the global financial crisis deepens and the global recession continues, the downside risks facing the Chinese economy are growing," Jiang Dingzhi, a vice-chairman of the China Banking Regulatory Commission, told a forum.
Non-performing loans on the books of Chinese banks were showing signs of trending higher after dropping to 5.5 percent at the end of September from 6.2 percent at the start of the year, he said. Jiang singled out the property sector for attention. With prices falling fast in some cities and sales dwindling, some experts doubt the housing market will recover for another year.
"The risk of defaults on home mortgage loans is accelerating," Jiang said. Another problem was that the gap between deposit rates and longer-term loans, which are set by the central bank, had shrunk, squeezing banks' margins. Although profit growth slowed sharply in the third quarter, Chinese banks are well capitalised and have been largely insulated from the turmoil that has brought lenders in the United States and Europe to their knees.
"According to all the indicators, Chinese banks are in the best condition ever," Jiang said. But he said the CBRC was making contingency plans such as establishing an emergency liquidity mechanism in case banks - including small lenders and foreign banks - encounter liquidity problems. He did not elaborate, except to say the CBRC would work with other government departments to manage risks in the banking system.
"China's banking system has never weathered the test of an economic cycle, and now the test has started," Yi Gang, a deputy governor of the People's Bank of China, told the conference. Goldman Sachs on Saturday became the latest bank to cut its 2009 growth forecasts for China.
It now sees gross domestic product growing by 7.5 percent instead of by 8.7 percent. In a note to clients, Goldman cited a sharp deterioration in the global environment and challenges facing domestic investment, particularly in the real estate sector.
STICK TO REFORMS Another CBRC vice-chairman, Wang Zhaoxing, told a separate forum that he was hopeful that the deterioration in loan portfolios could be contained. "Banks have their own prudent ways of making decisions and controlling risks, so we should remain confident that there'll be no problem in terms of non-performing loans," he said.
Speaking as leaders from 20 countries gathered in Washington to rake over the global financial crisis, Jiang highlighted three lessons for China: the need for banks to stress liquidity and risk management; the need for prudence in financial innovation; and the need to maintain strict supervision of financial firms.
Yi, the central bank vice-head, said the partial nationalisation of some US and European banks had prompted some people to question the market mechanism. But he said the success of China's banking overhaul showed the need to stick with market-orientated reforms. "So my conclusion is we must unswervingly continue on the socialist market-economy road," Yi said.
Wang, the deputy chief of the banking commission, also saw no need to change course. China would continue to open up its financial system and keep out the welcome mat for foreign financial firms that wanted to do business in China or take stakes in local institutions, he said.