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China economy

China sets about putting house in order, steps up supervision of financial institutions seen as too big to fail

  • Financial regulators issue guidelines for ‘systemically important’ institutions
  • Improved supervision comes in response to current downward pressures on economy
PUBLISHED : Wednesday, 28 November, 2018, 3:26pm
UPDATED : Wednesday, 28 November, 2018, 11:00pm

Beijing began the process of improving its supervision of Chinese financial institutions viewed as too big to fail, in latest efforts aimed at defusing risks amid a slowing economy and heightened tensions related to its trade war with the United States.

These “systemically” important banks, securities firms, insurance companies and financial holding companies are considered so large and interconnected with other institutions that their failure will threaten the stability of the Chinese – and global – financial system.

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Chinese regulators have jointly issued guidelines for the evaluation and supervision of these institutions, and will soon release a list identifying them, according to a circular posted on the website of the People’s Bank of China, China’s central bank. The list will be updated annually.

“Systemically important financial institutions must meet stricter supervision of their capital and leverage,” according to the central bank statement. Their liquidity and exposure to high-risk assets will also be monitored and regulated, it said.

These institutions will undergo regular risk evaluations and stress tests, and could face higher compliance costs, as they might have to boost their capital and meet government-set leverage limits.

But, “in the long run, the guidelines will help push systemically important financial institutions to take responsibility for their risks, prevent their blind prevention and ensure the healthy development of the financial sector and the stable operation of financial markets,” the central bank said.

Wu Qi, a senior fellow at Beijing-based think tank Pangoal Institution, said the new guidelines follow international best practice developed after the global financial crisis of 2008-09.

China’s four largest state-owned banks – Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China – have already been designated as important institutions to global finance by the Financial Stability Board and the Basel Committee on Banking Supervision, the international institution representing the world’s central banks that helps set global financial regulatory standards.

The new guidelines have also been issued in response to the current downward pressures on the Chinese economy, said Wu.

“Economic downward pressure is rising rapidly amid the trade war, and the [resulting] risks are likely to be transmitted to banks and the financial system,” he said.

The Politburo, China’s top decision-making body, switched its policy focus in August to stabilising the economy to counter the effects of external pressures, and both fiscal and monetary policies were eased to support growth.

The national non-performing loans ratio of commercial banks increased to 1.87 per cent at the end of quarter in September, according to government data, from 1.86 per cent in end June and 1.74 per cent from a year earlier.

But the economic slowdown and the effects of the government’s campaign to reduce excess debt and risky lending has had a much bigger effect on rural banks. For instance, Guiyang Rural Commercial Bank reported that its bad loans ratio had jumped to 19.54 per cent at end of 2017 from 4.13 per cent a year earlier.

Earlier this year, the Chinese leadership had made controlling financial risks one of its top three priorities for the next three years. However, with the economy growing in the third quarter at its slowest pace in 10 years, the government has eased back on its campaign to reduce debt in the past few months.

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The Chinese government has also reshuffled its financial regulation structure to improve supervision and ensure that risky financial innovation is examined by the authorities. The Financial Stability and Development Commission was chartered late last year to coordinate financial regulation, the central bank was empowered with macroprudential supervisory responsibility and the banking and insurance regulators were merged in March to fight the practice of financial institutions playing one regulator off against another to avoid oversight.