Banks' asset quality 'faces pressure'

"WMPs amounted to 9.1 trillion yuan by the end of June, having grown continuously since 2011," said Richard Zhu, partner of banking and capital markets at PwC China.

These products "have great potential for innovation to create distinctive advantages for the banks, even though they do not generate equally high returns as the net interest margin."

Many of the banks are innovating with WMPs to cope with interest-rate liberalization, said the report.

"The liberalization of interest rates demands a higher level of bank competence in asset, liability and interest-risk management," said Jimmy Leung, banking and capital markets chief for PwC China.

"Banks also need to improve their pricing capabilities and optimize their risk management competence to prepare for the eventual deposit-rate liberalization."

The China Banking Regulatory Commission introduced stricter rules for evaluating credit assets' quality in January. Capital adequacy ratios calculated using this new system were 0.5 to 1 percentage point lower than those computed using the previous method, according to PwC.

"The new regulation has pressured banks to seek additional capital," said Yung. "In the latter half, it is crucial for banks to taper capital consumption and explore supplementary capital instruments."

In spite of the risks, PwC believes that the asset quality and profitability of Chinese banks are relatively healthy. Further financial reform will require more effective resource allocation and risk diversification, which may also benefit the entire economy.

Zhuang Jian, an economist with the Asian Development Bank, said that there won't be any "damaging risks" so long as innovations are carried out within the scope of supervision.

"However, joint-stock lenders may face even larger pressure as their customers, mostly smaller enterprises, are more volatile in times of change than large State-owned" enterprises, Zhu warned.