China bank regulator says liquidity ample, debt risks manageable

Says total excess reserves in China's banking system totaled 1.5 trillion, more than double the amount necessary

China's chief banking regulator said on Saturday that liquidity in China's banking system is sufficient and pledged to control risks from local government debt, real estate and shadow banking.

Despite a cash squeeze that sent money-market interest rates soaring over the last two weeks, banks have more than enough reserves to meet settlement needs, Shang Fulin, chairman of the Chinese Banking Regulatory Commission (CBRC), said at a financial forum on Saturday.

"Over the last few days, due to multiple factors, the problem of tight liquidity has appeared in the market. But overall, liquidity in our banking system really isn't scarce," Shang said at a speech to the Lujiazui Forum in Shanghai

Shang said total excess reserves in China's banking system totaled 1.5 trillion, which he said was more than double the amount necessary for normal payment and settlement needs.

On the issue of banks' asset quality and, in particular, banks' exposure to local government debt and the real estate market, Shang acknowledged risks but said they were manageable.

"Recently, some international organizations and industry insiders have expressed worry about a slowdown in China's economic growth, local government debt, the real estate market, and related areas," Shang said.

"Currently everyone is fully aware of the risks. As long as we take proper risk control measures, these risks are controllable," Shang said.

On local debt, Shang pledged to closely monitor and control the growth in local borrowing and "alleviate hidden risks".

Outstanding bank loans to local government financing vehicles totaled 9.59 trillion yuan at the end of the first quarter, Shang said.

Amid the cash squeeze earlier this month, CBRC repeated previous orders to banks to report all forms of local government debt exposure to regulators, including funds channelled through wealth management products (WMP).

The central bank, which had let short-term borrowing costs spike to record highs to drive home a message to banks that they could no longer count on cheap cash to fund riskier operations, said it would ensure policy supported a slowing economy.

On the topic of WMPs, which have exploded in recent years as households and firms have searched for higher-yielding alternatives to traditional deposits, Shang said the development was positive but also highlighted risks.

"In reality, wealth management products are investment products. Wealth management products are not the same as savings. Investors have to bear investment risk. When banks do these products, are they clearly explaining the risks to investors?" Shang said.

Analysts have said that many WMP investors believe that many products carry an implicit guarantee from state-backed banks, even if no legal guarantee exists.

Bank-issued WMPs totaled 8.2 trillion yuan by the end of the first quarter, of which 70 percent were invested in the real economy.

Though Shang did not elaborate, the comments implied that the remaining 30% was invested in interbank assets, whose explosive growth was a key factor in the recent interbank liquidity squeeze.

On the real estate market, Shang downplayed the risk to the banking system, despite a three-year campaign by the central government to restrain housing prices.

Real estate loans totalled more than 13 trillion yuan by the end of April, of which mortgages comprised about 70 percent, Shang said.

"Chinese people are creditworthy. The non-performing loan ratio on mortgages is extremely low, far below 1 percent," Shang said.