China's banking regulator warns of risks from overcapacity, seeks limits on lending

March 11
10:14 PM 2016

Warning about risks from industrial overcapacity, China's banking regulator has advised commercial banks and financial institutions to keep limits on lending exposure. Risk assessments and collateral valuations are need of the hour in the wake of surging risks in the industrial sector. Joint stock banks have also been advised by the China Banking Regulatory Commission (CBRC) to set up investment pilot projects and asset securitization to enhance cash flows. 

Non-performing loans have more than doubled in 2015 as economic growth rate slowed down. China is suffering from the slowest economic growth rate in over two decades. Considering the ongoing adverse situation in the economy and industry, the China Banking Regulatory Commission asked joint-stock banks and city commercial lenders to keep tabs on their exposure to several industry verticals.

Yahoo Finance reports that China Banking Regulatory Commission advised banks and financial institutions to assess credit risks and potential asset losses. CBRC has also alerted lenders to apply limits on their exposure to sectors with overcapacity. China Banking Regulatory Commission has sent a notice to the banking sector alerting them on overcapacity situation in the industrial sector.

Commercial banks and other financial institutions have been advised by CBRC to dispose their non-performing loans. It has also further asked banks to explore innovative ways to address the issue of bad debts and diversify their processes. The China Banking Regulatory Commission also suggested city commercial banks to keep tabs on risks connected to industrial sectors, which are suffering from oversupply.

The Economic Times further adds that CBRC has advised joint stock banks to set up investment pilot projects and asset securitization to improve cash flows. Joint-stock lender is a bank with equity participation from a number of investors including government and private.

China Banking Regulatory Commission is keen on overcapacity issue among several industrial sectors such as steel and coal segments. It asked to list out qualified investors from domestic market and overseas for mobilizing funds and liquidity funds.

Joerg Wuttke, President of the European Union Chamber of Commerce in China, opines that the country has not taken proper measures to address overcapacity. Chinese steel industry's capacity is more than the combined production of the US, Japan, India and Russia, which are largest producers after the world's second largest economy.

The overcapacity problem is causing more operational issues in the Chinese industry including commodities segment. For instance, 60 percent of aluminum industry is suffering from negative cashflows. Chinese cement production has just equaled the volume produced in the US. Cement production in China is also rose very fast, as reported by Daily Nation.

While reviewing suggestions from CBRC, economists said banks and joint-stock lenders can refinance the companies which are suffering from overcapacity problem. Payment period to such firms can also be extended or restructure the debt finance as well so that overcapacity-hit industries can sail through rough weather.

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