China must cut dependence on bank debt: regulator

BEIJING -- China must cut its dependence on bank credit alone to drive economic growth and be wary of the risk of a rebound in bad debt, a banking regulator said in remarks published on Tuesday.

Yan Qingmin, assistant chairman of the China Banking Regulatory Commission, said weak demand in the current economic slowdown exposed banks to rising bad loans, particularly from industries with overcapacity, smaller enterprises and export-related businesses.

"Currently, we face presures from a rebound in bad bank loans in some areas, especially when small firms are affected by the economic slowdown and local government financing vehicles have entered a peak period in loan repayments," Yan said in an article he wrote in Financial News, an official newspaper operated by the People's Bank of China, the central bank.

"Given the high base of total bank loans, a rebound in bad loans could affect financial stability," he added.

China's economy slowed for a sixth successive quarter to 7.6 percent in the April-June period, its slackest pace in more than three years that dragged down growth in the first half of year to 7.8 percent.

He said that China's credit to GDP ratio had climbed in recent years, hitting 123.4 percent by the end of 2011 - an unsustainable level that overly concentrates risks on the banking sector.

China's recent efforts to liberalize its interest rate system would squeeze bank profits and should force a shift in their business orientation from lending to fee-based income in the future, Yan said.

Fee-based services around underwriting securities issues, dealmaking and advisory work are key sources of income for international banks in developed markets.

Analysts say a vibrant corporate bond market is one of the surest ways to help China build a dynamic private sector with access to abundant, cost-effective capital.

China launched its high-yield "junk bond" market in June, kicking off a new funding channel that by some estimates will see as much as $50 billion in capital flow to cash-starved private Chinese companies within a few years.