Risk skills threat to competitiveness

PUBLISHED : Friday, 30 November, 2007, 12:00am
UPDATED : Friday, 30 November, 2007, 12:00am

Central bank governor Zhou Xiaochuan warned lenders and other financial institutions yesterday that poor risk management skills threatened competitiveness and could be disastrous during an economic slump.

Reiterating his support for mainland institutions to make investments overseas, Mr Zhou said exposure to global competition was vital for domestic companies to improve their performance.

His comments come at a time of record profitability at mainland banks but during rising uncertainty in global markets.

'Many financial institutions have recently entered the market and do not understand the economic cycle. They do not have the capability and risk management controls to survive an economic downturn,' Mr Zhou, head of the People's Bank of China, said at a banking conference.

'To increase competitiveness, financial players need a role on the international stage ... some institutions are only competitive locally. They need to expand their horizons.'

Mr Zhou praised Industrial and Commercial Bank of China, now the world's biggest lender by market capitalisation, for its acquisition last month of a 20 per cent stake in South Africa's Standard Bank.

Judicious strategic partnerships were needed to stimulate financial innovation and help mainland financial institutions to price risk more effectively, he added.

'Mainland banks' risk management systems are in a middle state of development. In the region, they probably still lag behind Thailand and Malaysia,' said Peter Tebbutt, senior director of Asian financial institutions at Fitch Ratings.

'They are operating in an economy that has been booming for many years.

'Many lending officers have probably never seen a loan go bad.'

Improving risk controls is a priority for the entire financial industry. The securities regulator is establishing a compliance management system to help clean up the notoriously unprofessional brokerage industry.

Shang Fulin, the head of the China Securities Regulatory Commission, said improved risk management was needed before allowing more foreign investment banks to set up joint-ventures with brokerages.

With additional reporting by Jane Cai