Chinese banks wait for signal on direction (2)

NPL ratio low

The overall non-performing loan ratio of Chinese commercial banks stood at only 0.95 percent at the end of September - very low by global standards.

But appearances can be deceiving. The specter of shadow banking risk now looms over the industry's future.

Chinese banks have been hiding risks off their balance sheets with wealth management products that carry higher interest returns than traditional bank deposits.

The money is channeled into the unregulated shadow banking system, which, in turn, finances real estate, infrastructure and other projects that might otherwise have difficulties getting loans from banks.

The CBRC now stipulates financial instruments with capital guarantees must be shown on balance sheets, though non-guaranteed products can continue to be left out, according to Reuters.

The regulatory move came after a wealth management product sold in a Hua Xia Bank outlet in Shanghai failed to repay investors. The Beijing-based, mid-sized lender was among the most active issuers of such financial instruments.

China International Capital Co said last week that investors who purchased the Hua Xia product should bear the responsibility themselves because the contract guarantees no principal or interest returns.

The lender blamed an employee for selling the risky product, which was distributed by a third party, without authorization.

CICC, the nation's largest investment banking firm, said Hua Xia is guilty of reckless internal management but shouldn't be held responsible for the repayments.

CICC said the case has important repercussions for the banking industry. If the banking regulator forces Hua Xia to pay those investors, that will send a warning signal to all banks engaged in similar practices.

"It will have a disastrous impact on all financial institutions, not just the banks, which will further distort the pricing system of financial risks," CICC said. "In the long run, the CBRC needs to arouse public awareness of credit risk and strengthen its supervision over shadow banking."

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