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Banks need to be on guard

(China Daily)
Updated: 2009-02-27 07:40

The sound performance of Chinese banks last year must have made them the envy of much of the world. But the real test for them is yet to come as the global financial crisis worsens and domestic economic growth slows this year.

The message that Liu Mingkang, chairman of the China Banking Regulatory Commission, delivered at a press conference yesterday is reassuring. While encouraging credit expansion to support the country's stimulus package, the banking regulator also urged domestic lenders to improve risk management.

Such a sober regulatory mind is much needed to help sharpen Chinese banks' long-term competitiveness. The strong fundamentals of the Chinese economy have indeed laid a solid foundation for domestic banks to thrive, but they can succeed only by making risk control a top priority.

Largely because of the global financial crisis and economic downturn, China's economy slowed sharply later last year, hit hard by weakening exports and sluggish property investment. Amid other efforts to spur economic growth, the Chinese government has hence called on domestic lenders to extend more credit, arousing worries of rising bad loans in deteriorating economic conditions.

In spite of all the difficulties, domestic banks managed to cut non-performing loans by 700 billion yuan ($102 billion) to 568 billion yuan, bringing the non-performing loan ratio down by 3.71 percentage points to 2.45 percent by the end of 2008.

Even better, the sector's profit increased 30 percent year on year to 583.4 billion. In a year when many foreign banking giants were suffering from unprecedented losses, the profitability of Chinese banks looked really remarkable.

However, the impressive achievement does not guarantee continuous success for Chinese banks as financial crisis and economic recession show little signs of abating.

On one hand, there is increased pressure on banks' earnings in 2009, including the narrowing of interest rate spread, shrinking income from intermediary businesses and higher risks involved in overseas investment.

On the other hand, the urgent need for domestic banks to shore up credit support to small and medium-sized firms and agricultural projects will require extra risk control as well as special expertise about these businesses.

It is a great challenge for Chinese banks to respond prudentially and innovatively to these new tasks. They should demonstrate not only their ability to make important contributions to economic growth but also their commitment to stricter risk control for the long-term health of themselves as well as the Chinese economy.

(China Daily 02/27/2009 page6)