China’s banking regulator urges lenders to up their risk management measures

Banks are urged to stop lending to zombie companies and shell companies in CBRC guidelines highlighting 10 types of specific risk

China’s banking regulator has urged commercial lenders to be more vigilant when dishing out loans after a spate of heavily indebted companies found themselves in hot water in the last month.

The China Banking Regulatory Commission (CBRC) issued new guidelines specifically highlighting 10 types of credit risk the banks should pay more attention to.

These included risks arising from bond investment, inter-bank lending, wealth-management business, property, and internet financing.

The dangers of unchecked leverage came back under the spotlight in recent weeks when China Huishan Dairy Holdings called an emergency meeting regarding debts of up to 11 billion yuan it found itself unable to pay on time, while a credit chain in northeast Shandong has put several listed companies in trouble after one of them defaulted on debt worth around 7 billion yuan.

“Banks should effectively verify clients with high risks, and prevent granting credit to zombie companies or shell companies,” the guidelines say.

They also advise lenders to adopt measures such as increased scrutiny of loans which have been overdue for 90 days or more, in order to strengthen risk control and maintain asset quality. But they did not recommend what specific action should be taken.

China’s banks extended a record 12.65 trillion yuan of loans in 2016, despite worries about the dangers of prolonged debt-fuelled stimulus.
The country’s corporate debt is estimated at 175 per cent of GDP, among the highest in emerging economies. It has climbed from less than 100 per cent of GDP at the end of 2008, according to a report issued by the Paris-based Organisation for Economic Cooperation and Development in mid March.

In their annual reports issued in the past month, Chinese banks have cited deteriorating credit quality and high corporate debt leverage as a primary challenge for the industry.

Bad loans written off and transferred out by the top five banks rose by 16 per cent to 309.6 billion yuan from the previous year.