Regulator to ‘effectively control' expansion of local debt and shadow banking, official says

A persistent economic slowdown will create new financial risks for the banking sector, but measures will be taken to maintain the bottom line, a senior official from the China Banking Regulatory Commission said on Friday.

The rate of nonperforming loans by financial institutions stood at 1.64 percent last year, up from 1.49 percent at the end of 2013, according to the commission.

Nonperforming loans for commercial banks amounted to 1.29 percent last year, up from 1 percent in 2013.

New financial risks arise when enterprises face excess capacity and the property market is sluggish, said Wang Zhaoxing, deputy chairman of the commission.

"We have done stress testing in the banking sector showing that stronger regulation is needed to prevent systemic and regional financial risks, especially during an economic slowdown and structural rebalancing period," Wang said.

The country's top banking regulator raised the capital adequacy ratio of commercial banks to 12.93 percent in November, up from 12.18 percent a year earlier and much higher than the global standards.

The NPL provisioning coverage ratio remains at 230.5 percent, according to the commission.

"We will effectively control shadow banking and the expansion of local debt to limit new risks," Wang said.

A recent report from UBS AG, a Swiss global financial services company, said that "the government will manage liquidity conditions adequately, and chances of systemic financial problems are very small".

"The risk is that unexpected large capital outflows, inadequate liquidity provisioning, deteriorating corporate balance sheets and a breakout of shadow credit defaults may trigger heightened financial distress among corporate and small financial institutions, generating a negative surprise for the market," said Wang Tao, chief economist in China at UBS AG.

Research from Moody's showed that shadow banking activity has slowed in recent quarters as a result of policy measures aimed at containing financial risk.

"Shadow banking activity has shifted to areas such as e-financing platforms and margin financing in the equity market," Moody's said.

Li Xiang contributed to this story.