Watchdog sending mixed messages

Actions speak louder than words, according to analysts, who are querying recent signals from the mainland banking watchdog, the China Banking Regulatory Commission.

They said the CBRC had been toughening its rhetoric with banks on one hand, while giving them more freedom when dealing with local government debt matters on the other.

For example, Chinese banks were told yesterday that a one-off extension of maturities for local government debt for a maximum of five years was allowed, according to the Economic Information Daily newspaper.

The paper also said the banks must give regulators a fresh assessment of their local government loan exposure by the end of next month.

'If banks are found rolling over such loans repeatedly, they will be severely punished,' the paper reported, citing a loan officer at a state bank.

China's 2008 stimulus programme in the wake of the global financial crisis saddled local governments with 10.7 trillion yuan (HK$13.2 billion) in debt, of which more than half is due over the next three years.

However, despite its push for leniency with local governments, the CBRC has recently threatened to punish banks using off-balance sheet lending to evade credit monitoring, according to a Xinhua report on Monday. The regulator also announced last week that it would crack down on banks that cross-sell products, request deposits or charge extra fees in return for granting loans to companies.

Analysts said the watchdog appeared to have loosened its grip on the industry, raising potential concerns about the long-term health of the sector, despite recent tough talk from the CBRC.

'If you look at the [official] warnings, none of them are really new. It's more of a stance that [CBRC chairman] Shang Fulin is taking as he asserts his new position,' said Stanley Li, a senior analyst at Mirae Asset Securities. 'The CBRC lacks the clout to impose truly harsh penalties.'

Shang, 60, who was appointed head of the CBRC in October last year, has spent his career in finance. He has also served as a deputy governor at the People's Bank of China and was head of the China Securities Regulatory Commission, the watchdog for stock markets.

The CBRC has also effectively postponed implementation of Basel III regulations which impose higher capital standards on banks.

Chinese banks had been due to start the changes last month, but a new date has yet to be announced.

'Recent policy developments have been a 180-degree shift from 12 months ago,' said Sheng Nan, a senior analyst at CCB International. Sheng said the CBRC was no longer taking a counter-cyclical approach to monitoring banks.

The CBRC now issues verbal warnings or notices almost monthly to the banks about irregularities in their off-balance sheet activities, the risk arising from wealth management products and misconduct in granting loans or attracting deposits - but the underlying problems persist, analysts said.

Michael Werner, a senior analyst at Sanford C. Bernstein, however, said the reason for the change in CBRC policies from a year ago was because of differences in the economic environment.

'When things are good, the CBRC takes a tightening regulatory approach to save for a rainy day. When the economy turns, you will get a 180-degree shift,' he said.

30b

The amount, in yuan, lent by the mainland's four largest banks in the first 12 days of the month, according to media reports