China's banking regulatory body is urging domestic commercial banks to pay close attention to the risks the banking sector is facing.

 

The country's general economic performance was sound during the first half of the year, but banking institutions should further study current economic and financial situations, said Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC).

 

"The institutions should be able to give early warnings to risks in the banking sector and work out specific measures to safeguard the sector's healthy development," Liu said.

 

Liu made the statement on Friday at a meeting with China's major commercial banks.

 

"China's financial institutions should closely watch three major risks in the banking sector: credit risk, market risk and operational risk," Liu said.

 

He said banks should pay special attention to changes and problems appearing in electricity, coal, steel, real estate, automotive and transportation industries.

 

"Market risk with commercial banks is growing with the reform of the financial system, diversification of consumer demands, increased competition and more complicated financial products," Liu said.

 

In addition, anticipation of renminbi appreciation, changes in the exchange rate, liberalization of the interest rate and bond price fluctuations impose higher requirements on commercial banks' risk management.

 

The commercial banks should be aware of operational risk, Liu said. With the implementation of a special program, the number of cases decreased in the first half of the year compared with a year ago.

 

There were occasionally cases, however, especially in rural cooperative financial institutions and State-owned commercial banks.

 

Statistics from the CBRC show the number of cases in rural credit cooperatives account for about half of the total, while the value of billing scandals was more than half of the total value.

 

"Banks should take measures targeting these two issues to strengthen preventive moves and punishment," he said.

 

The banking regulator also urged commercial banks to pay attention to loan risks related to land reserve and false mortgages in real estate projects.

 

Risks from packaging loans and cross-border projects of local governments exist as well.

 

Another risky area involves loans to high pollution enterprises and enterprises with high energy consumption.

 

These firms are rapidly developing now, and financial institutions compete to offer loans to them.

 

However, rising energy and material costs, as well as high input in pollution control, will weaken their abilities to pay money back.

 

Liu called upon financial institutions to shore up internal risk controls and use international rules and legal methods to control risks from outside.

 

"Commercial banks should give loans strictly following requirements and control loan growth in line with regulatory demands," he said.

 

(China Daily July 15, 2006)