UPDATE 2-Chinese banks may see more bad loans, face internet challenges

Tue Apr 8, 2014 10:25am EDT

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(Adds CIC comments on internet finance)

Aileen Wang/Kevin Yao

BOAO, China, April 8 - China's banks may see bad loans rising again this year because of government efforts to reduce overcapacity in some industries, Yan Qingmin, a vice chairman of the China Banking Regulatory Commission (CBRC) said on Tuesday.

Even so, the average non-performing loan (NPL) ratio of Chinese banks should be kept to around 1 percent at the end of 2014, because they have set aside enough provisions, Yan told reporters at the Boao forum in the tropical island of Hainan

Chinese official media reported last week that the CBRC would conduct regional and national bank stress tests after bad loans spiked last year, reflecting growing concern over credit risk in the world's second-largest economy.

The NPL ratio at Chinese banks rose to 1.0 percent at the end of December, its highest level in two years, the CBRC reported in February.

Bankers and analysts expect bad loans to rise further this year as economic growth slows and banks deal with the aftermath of a lending binge that policymakers unleashed to soften the impact of the global financial crisis in 2008.

In addition to the mounting bad-loan pressure, China’s brick-and-mortar banks are also facing a growing challenge from booming internet finance services, which have developed rapidly over the past months and drawn funds away from bank deposits.

Tension has escalated between conventional lenders and internet heavyweights in recent weeks. Banks have imposed limits on how much their customers can transfer to online finance services, and authorities are looking into potentially tighter regulation.

Yan at the CBRC also made clear the regulator's stance on supervising the fledging sector.

"We must appropriately regulate the internet finance industry, and in the future we will set a basic or minimum threshold for the market access," Yan said. "Otherwise, we will see unfair competition in the sector."

Although the sector is small, online and mobile payment transactions in China have been expanding rapidly. The online- payment market last year grew 47 percent to 5.37 trillion yuan ($869.20 billion) in transactions, according to Beijing-based consultancy iResearch.

Internet companies have also rolled out higher-yielding online financial products to compete with banks, contributing to interest rate liberalisation in China.

Separately, a senior official at the country's $575 billion sovereign wealth fund also said the internet finance business must get regulatory guidance.

Internet technology could magnify risk for the financial system if necessary regulation lags behind the sector’s growth , Xie Ping, an executive vice president of China Investment Corp, said in a report issued at the 2014 Boao Forum.

“It is by no means an easy thing to regulate internet finance, as online services could amplify risks in the traditional financial sector, which poses higher requirement for the existing regulation system,” he said in the report.

The Chinese government has been trying to tread a fine line between controlling risk and encouraging financial innovation. It wants to ensure stability in the financial sector while not killing the vigor needed for long-awaited reforms.

Among the proposed regulations in the report is including online lending activities, such as peer-to-peer lending, into the statistics category of total social financing, the central bank’s broader measure of liquidity in the real economy.

The report also urged internet financial firms to conduct regular risk analysis based on liabilities, liquidity and financial status as well as to set up risk-alert mechanism to minimize risk contagion.

To strengthen supervision, the government could also put in place administrative measures, such as raising the market access threshold and tightening procedures for license applications byonline financial businesses, the report said. (Reporting by Aileen Wang and Kevin Yao; Editing by Larry King)

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