China's banking regulator has announced that risk control will be the top priority for this year, a move that industry analysts said Tuesday was a result of persistent concerns over the asset quality of financial institutions.
Special attention shall be given to credit default risk, off-balance sheet activities such as issuance of wealth management products, and risks from private and underground lending spreading to the banking system, the China Banking Regulatory Commission (CBRC) said in the minutes of an annual meeting held Monday.
The default risk is derived from local government financing vehicles (LGFVs), property loans and industries exposed to overcapacity problems, the regulator said.
There is also a longer-term issue regarding commercial banks' asset quality, Charlene Chu, senior director at Fitch Ratings China, told the Global Times Tuesday.
Borrowers may have difficulty repaying loans, given the unprecedented expansion in credit in recent years, Chu noted.
The regulator's statement indicates that banks' expanded off-balance sheet financing for LGFVs in 2012 may be reined in this year, the 21st Century Business Herald reported Tuesday, citing the manager of a State-owned bank.
About 1 trillion yuan ($162 billion) from 20 trillion yuan in wealth management products sold to individuals has been used to support LGFVs and the real estate sector, and this segment faces a potential default risk, said Ma Jun, Deutsche Bank's chief China economist, at a media briefing Monday.
"Default risks persist among LGFVs and the property sector, but the manufacturers facing overcapacity problems could turn out to be the biggest concern," said Liao Qiang, director of financial institutions ratings at Standard & Poor's.
These manufacturers, including steel makers and cement producers, have seen their financial leverage worsening and their cash flow tightening for quite some time, Liao said.
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