BEIJING: China will step up oversight in the banking sector this year to reduce financial risks, the country’s banking regulator said, stressing that long-term efforts would be needed to control banking sector chaos.

The China Banking Regulatory Commission (CBRC) said late on Saturday in a statement that its priorities included increasing supervision over shadow banking and interbank activities.

“Banking shareholder management, corporate governance and risk control mechanisms are still relatively weak, and root causes creating market chaos have not fundamentally changed,” the CBRC said.

“Bringing the banking sector under control will be long-term, arduous, and complex,” it said.

The regulator said violations in corporate governance, property loans, and disposal of non-performing assets will be punished more strictly, and that it would strengthen risk control in interbank activities, financial products and off-balance sheet business.

China has repeatedly vowed to clean up disorder in its banking system.

In recent months, regulators have introduced a series of new measures aimed at controlling risk and leverage in the financial system, with everything from lending practices to shadow banking under the microscope. Already in January, the CBRC has published regulations that put limits on the number of commercial banks that single investors can have major holdings in.

financial risk

President Xi Jinping has declared that financial security is vital to national security.

The government is particularly concerned about the massive shadow banking industry, lending conducted outside of the regulated formal banking system.

It fears that a big default or series of loan losses could cascade through the world’s second-biggest economy, leading to a sudden halt in bank lending.

Meanwhile the China’s bank lending halved in December as the government kept up its campaign to curb financial system risks, but banks still managed to dole out a record amount for the year amid the tighter scrutiny.

Chinese banks extended 584.4 billion yuan ($90.46 billion) in December, data from the People’s Bank of China (PBOC) showed on Friday, well below analysts’ expectations of 1 trillion yuan and sharply down from November’s 1.12 trillion yuan. But they lent a record 13.53 trillion yuan of new loans in 2017.

Chinese authorities are trying to walk a fine line by containing riskier types of financing and slowing an explosive build-up in debt without stunting economic growth. New bank loans last year surpassed 2016’s record tally of 12.65 trillion yuan, as a crackdown on riskier shadow lending have forced banks to shift such loans back onto their books.

Since the start of this year, Chinese regulators have taken a slew of steps to force financial institutions to deleverage, targeting everything from bond trading, banks’ NCD debt issuance to entrusted loans.

Analysts have attributed the appetite for loans partly to the crackdown on off-balance sheet lending although there are signs tighter liquidity is starting to hit the economy.

“Our China Activity Proxy suggests that growth has started to suffer recently as a result of this slowdown in credit growth. We expect further weakness in the months ahead, which we think will eventually trigger monetary easing by the PBOC,” Capital Economics Senior China Economist Julian Evans-Pritchard said in a report.

Household loans, mostly mortgages, fell to 329.4 billion yuan in December from 620.5 billion yuan in November, according to Reuters calculations based on the central bank’s data.

Reuters