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China bank regulator says risks under control

By Elaine Kurtenbach
AP Business Writer / October 19, 2011

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SHANGHAI—China's top banking regulator says the country's lenders have risks under control, despite concerns that massive local debts and ripple effects from failed informal lending schemes threaten the country's financial stability.

"We are generally concerned about local government financing loans, real estate loans, shadow banking and other areas of potential risk," Liu Mingkang, chairman of the China Banking Regulatory Commission, said in remarks released Thursday on the CBRC's website.

But he added that the government and banking regulators had the foresight to take effective action, saying that "overall risks are controllable."

Liu pledged to strictly control risks from lending to local governments and from non-bank lending -- a crucial but now strained source of financing for private industry.

In remarks to a conference Wednesday in Beijing, Liu accused analysts and rating agencies for "bad-mouthing" China's banks and economy, saying they were underestimating China's capacity for reform and management.

China's mostly state-run banks have curbed lending as regulators have tightened monetary policy while requiring them to keep record levels of reserves to help cool inflation.

But an unknown amount of bank loans have gone into private lending, where pyramids of high-interest loans are collapsing as mostly smaller and medium-size private companies defaulted on debts.

In some cases, the companies are going unpaid by customers embroiled in debt problems of their own, and sometimes they have used the money borrowed to invest not in manufacturing but in speculative investments of their own.

The government has intervened, ordering banks to relax repayment terms and loosen credit for small and medium-size enterprises,

UBS economist Tao Wang puts informal lending at between 2 trillion and 4 trillion yuan ($314 billion-$628 billion), or up to 10 percent of China's GDP.

She says China's massive state-run banks would face little impact from some of those loans turning bad. A bigger risk is Wenzhou's credit squeeze spreading to other parts of the world's No. 2 economy.

At the same time, Liu acknowledged concern over the estimated 10.7 trillion yuan ($1.7 trillion) in debts -- or about 27 percent of GDP -- owed by local governments that have borrowed heavily to help support stimulus-related construction projects.

"It is undeniable that local government financing platforms have not been prudently managed. A lack of monitoring mechanisms and other problems have created a number of risks," he said.

Ultimately, the government is responsible for such loans, Liu said. But he noted that local governments also have significant assets that can be used to help repay debts.

He promised strict control of local government borrowing and use of loan guarantees and an improvement to transparency in government budgets.

China's commercial banks have an average capital adequacy ratio of more than 12 percent and ample provisions to cover any loans gone sour, Liu said in outlining the sector's relative strengths.

He also noted that China's total public sector debt remains at 50 percent, below the conventional warning level of 60 percent and well below levels in the U.S. and Europe.

"Risk exposure has been effectively curbed," he said.

Liu said that real estate-related lending accounts for 10.4 trillion yuan ($1.6 trillion) of total loans, well below levels in other countries, and that stress tests had found that the banks were in "general control of real estate risks."

Some analysts have expressed concern over what they say is a significant amount of "off-balance sheet" lending, however, that may eventually pose a greater threat in the longer term.