There's no liquidity shortage in China's banking system, the chief of its watchdog agency told the Lujiazui Forum in Shanghai yesterday.

But banks should pay attention to liquidity management and risk exposure, including local government debt, Shang Fulin, chairman of the China Banking Regulatory Commission, said.

He said the credit crunch has eased and that the government will allow the opening of private banks in financial sector reforms.

Surging money market rates in recent weeks have prompted debate on whether lenders' liquidity would pose a risk to the whole financial system if the Chinese central bank doesn't inject funds.

"China's banking industry is not short of liquidity in general, as excess reserves topped 1.5 trillion yuan (US$242 billion) on June 28, more than double the requirement for normal payment and settlement needs," Shang said.

Excess reserves are the amount of cash above the reserve requirement that banks hold in their accounts at the central bank.

These provide an extra buffer for banks' settlement needs at times of liquidity shortfall.

The keynote speech by Shang chimed with a statement by the People's Bank of China earlier in the week. It said financial conditions are steady, given the large reserves banks have set aside in their central bank accounts.

Shang said the credit crunch that has pushed up interbank rates to a record high has eased and will not impact on the stable growth of China's banking.

Flawed liquidity management was exposed by the cash squeeze, with lending to local government financing vehicles and the real estate market weighing on lenders' control of asset quality.

Outstanding loans to financing vehicles reached 9.59 trillion yuan by the end of March, with the bad loan ratio at a low 0.14 percent. Meanwhile, real estate loans totaled over 13 trillion yuan by the end of April, of which 70 percent was mortgages, said Shang. He acknowledged the credit risks of these loans, but said they were controllable.

Shang also said the CBRC will make a top-level design for banking reforms, while taking into account supporting the real economy and financial risk prevention. "There will be a major breakthrough of private capital investment in the banking sector," Shang said. "Private banks, financial leasing companies and consumer finance companies will be allowed to open." And private capital is encouraged to participate in restructuring of financial institutions.

Shang called for more transparent disclosure of China's rapidly growing wealth management products. He said it is banks' responsibility to disclose the investment risk to the investors.

Investors must bear the risk for themselves, as the wealth management products are investment products with higher risks.

Outstanding wealth management products issued by banks totaled 8.2 trillion yuan by the end of the first quarter, of which 70 percent was invested in the real economy.

The three-day financial forum concluded yesterday.

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