Chinese banks should be alert to the risks of growing bad loans and narrowing profit margins amid a worsening global financial crisis and domestic interest rate cuts, a senior banking regulator has warned.

China Banking Regulatory Commission Vice-Chairman Jiang Dingzhi told a financial forum in Beijing on Saturday that China's banking system, despite being generally healthy, faces growing risks.

"Our judgment is that losses at overseas financial institutions will widen further, and capital shortfalls will become more serious," Jiang said.

"The financial crisis won't end in the near term. So we should not turn a blind eye to the risks " Jiang said, warning that the first risk China may face in the coming years is "exported inflation" from developed economies.

He said many developed economies have taken quick action to inject huge liquidity and credit into their banks to stabilize financial systems and it is likely that the banks will export capital to developing countries such as China (through direct investment or loans).

"That may cause high inflation (for us) and we should keep a close eye on cross-border capital flows," said Jiang.

Jiang also warned that bad loans, especially in the real estate sector, are the second risk that China's banks are confronted with.

"Bad loans are already showing an upward trend, especially in the property market where the mortgage default risk is growing at an accelerating pace," Jiang said, without elaborating.

Jiang also said Chinese banks may encounter growing losses from their overseas investment as the global financial crisis remains "far from over".

The government said earlier that Chinese banks suffered "very limited losses" overseas as their exposure to bankrupt global financial companies was not much.

Jiang said Chinese banks also face narrowing profit margins as the central bank cuts interest rates to boost the slowing economy. Banks are encouraged to lend after the government announced a 4 trillion yuan (US$586 billion) stimulus plan a week ago.

The People's Bank of China has cut interest rates thrice this year after economic growth cooled to 9 percent in the third quarter, the slowest rate in five years. He said the banks will see declining profits next year as lower interest rates shrink margins and loan defaults may increase.

However, Jin Liqun, chairman of the supervisory board of China Investment Corp, said Chinese banks should continue market-oriented reforms despite the risks.

"All these risks cannot be used as excuses to defer further reform in the banking system," said Jin at the forum. "Only with market-oriented reforms can our banks further build up their capabilities in profit-making and risk-prevention."

Jiang said China's banking system remains "in good health" with all major indicators at their best levels ever.

Banks' total assets, 59.3 trillion yuan at the end of September, were five times the level of 10 years ago when the Asian financial crisis erupted, he added. And banks reduced their average bad-loan ratio to 5.49 percent at the end of September, from 6.3 percent at the end of March.

"These sound indicators are the basis of our confidence to battle financial crisis," Jiang said.

(China Daily November 17, 2008)