Stress tests 'don't fully reflect China's reality'
The People's Bank of China (PBOC), the country's central bank, said on Thursday that the nation's financial system has demonstrated a rather strong ability to counter risks, in a rebuttal of parts of a financial system stability assessment report released by the IMF on Wednesday.
The central bank said, however, that the IMF's assessment of China's financial system is fair in a general sense.
Commenting on the IMF report, the China Banking Regulatory Commission said in a statement on Thursday night that it would carry out further reforms to improve the banking sector's effectiveness and prevent systemic financial risks.
The IMF said in the report that China's increasingly complex financial system has "shown financial stability risks," one being that banks' capital adequacy status is uneven, with the Big Four having adequate capital, while smaller banks' capital status appears "vulnerable."
Based on the results of a stress test, the IMF said that many Chinese joint-stock and city commercial banks have "widespread and large undercapitalization" under a severely adverse scenario.
According to the IMF's stress test data, the Tier 1 capital adequacy ratio of medium-sized banks was 3.8 percent under a severely adverse scenario.
Zhao Yarui, a senior research fellow at the Financial Research Center under the Bank of Communications, told the Global Times on Thursday that based on this figure, the situation is a little serious for smaller banks in China. But she stressed that "stress tests can't fully represent reality."
Jiang Han, a research fellow at Suning Financial Research Institute, told the Global Times on Thursday that the IMF's evaluation is flawed as China's financial system is different from those in Western countries, so domestic banks' situation can't be judged with one international standard.
According to Zhao, uneven bank capitalization does exist in China, but that is nothing abnormal.
"Big banks have more assets, so their capital volume is generally bigger," she noted.
Meanwhile, she said, deposits usually represent a higher proportion of total capital for big banks, as people are more willing to deposit money in big banks, and that improves their liquidity.
"Smaller banks tend to rely more on interbank business and asset management, but in the face of stricter government management amid a national campaign to crack down on leveraging in recent years, their liquidity has gotten even tighter," she noted.
But Zhao said that although there are some liquidity risks, especially among smaller banks, it's an exaggeration to say that those are "serious risks" or that they could have systemic implications.
"So far this year, there haven't been capital crunches like those of 2013," she noted, adding that the government also has reserve measures to inject liquidity if capital risks worsen.
Smaller-scale banks can solve the funding problem in diversified ways, Jiang said.
For instance, they can extend their business lines in second-tier cities by offering rural financial services. There are more abundant funds in these regions, so that downward extension will help attract more funds effectively, Jiang noted.
Another approach can be improvement in the operation of the capital market. At the current stage, tight capital in China is a cyclical issue. Meanwhile there is a certain degree of market mismatch, where funds have not found suitable projects. This situation requires the capital market to improve its business operations, Jiang pointed out.
"Banks need to look into transformation of their direct investment capabilities," Wang Yonghua, postdoctoral researcher at the Development Institute of Fudan University, told the Global Times on Thursday.
For instance, they can work on in-depth cooperation with local featured industries, and conduct trials of new business models including rural financing, consumer credit and technology finance products, Wang said.
Yu Fenghui, a financial commentator based in Zhengzhou, Central China's Henan Province, said that Chinese banks should develop an innovative verification system. "They can consider working with Internet companies such as Baidu to generate full visibility in their credit evaluation system, or develop their own big data systems to unearth credit information and curb risks," Yu told the Global Times on Thursday.
The IMF's stress test data showed that all the tested banks have a 7.8 percent Tier 1 capital adequacy ratio, which represents China's generally good financial risk-reduction abilities, the PBOC argued.
The PBOC also said that the quality of China's banking assets is improving, as domestic banks' bad loan ratio is relatively low thanks to factors like the rebounding profits of domestic enterprises this year and increasing efforts by the banks to resolve bad loans.
Data released by China's banking regulator on November 10 showed that domestic commercial banks had an average nonperforming loan (NPL) rate of 1.74 percent as of the end of the third quarter this year, on par with the end of the second quarter.
Zhao noted that China's NPL scale is still increasing but at a slower rate, and the NPL ratio has been unchanged for several quarters. "This shows that the situation has stabilized, although a turning point has not arrived yet," she said.
The IMF report said that China is undertaking a "necessary but prolonged economic and financial transformation," with the government aiming to launch financial reforms and control risks.
It also suggested that China should have a gradual and targeted increase in bank capital, as well as tighter supervision of financial conglomerates.
"Overall, the government has provided the right direction in the past few years, from the National Financial Work Conference held in July to financial reforms," Yu said.
