A number of events took place in the banking sector recently, and they all seem to be closely connected.
First is the merger of the China Banking Regulatory Commission (CBRC) and China Insurance Regulatory Commission (CIRC), which is apparently aimed at boosting the regulators’ capability to enforce financial deleveraging and risk control.
The CBRC also issued a document reducing the provision coverage ratios to as low as 120 percent for banks with healthy books, down from the current 150 percent, Shanghai Securities News reported.
But there is a precondition: banks are asked to step up their efforts in writing off bad loans.
Meanwhile, Agricultural Bank of China (AgBank) unveiled plans to raise up to 100 billion yuan (US$15.85 billion) in the biggest-ever A-share private placement.
The announcement was a surprise because the nation’s third-largest lender by assets has capital adequacy ratio and bad loan coverage ratio above the levels required by authorities.
The bank’s outstanding non-performing loans balance and non-performing loan ratio both recorded declines last year; capital replenishment seems unnecessary.
I believe all these moves are related to China’s general policy direction.
President Xi Jinping’s top economic advisor, Liu He, has repeatedly stressed that the nation’s financial policy will focus on lowering leverage, stemming financial risks and increasing direct financing in the next three years.
The lower provision coverage ratio will mean bigger earnings, which can be used to write off more bad loans. As such, the move will boost the soundness and long-term profitability of Chinese banks.
AgBank’s move can be seen as a prelude to more widespread fund-raising activities, which will strengthen the capital base of the banking industry.
All these moves will help ensure the stability of China’s financial system.
The full article appeared in the Hong Kong Economic Journal on March 14
Translation by Julie Zhu
[Chinese version 中文版]
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