China’s Banking Sector Passes Stress Tests with Ease, Risk Concentrated in Regional Sectors: PBOC

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The Chinese banking sector has passed a recent round of stress tests with ease according to a senior official from the People’s Bank of China’s (PBOC).

Sun Tianqi (孙天琦), head of PBOC’s financial stability department, said that the results of China’s banking sector stress tests indicate that it retains “comparatively strong ability to withstand the shock of an economic downturn.”

Sun made the remarks on 18 November at the “2021 China Banking Sector High Quality Development Forum” (2021年度中国银行业高质量发展论坛).

Under light, medium and heavy stress testing conditions China’s 30 biggest banks in terms of assets saw their overall capital adequacy ratio decline from 15.28% at the end of 2020 to 13.60%, 13.35% and 13.01% respectively during the period from 2021 to 2023.

These figures are still well ahead of the regulatory threshold of 10.5%.

Sun said PBOC has categorised a total of 422 lenders as 8 – 10 grade high risk institutions, accounting for only 1.36% of banking sector assets.

As of the end of the second quarter of 2021 the total assets of China’s financial sector institutions stood at 371.26 trillion yuan, including banking sector assets of 336 trillion yuan, accounting for 90.5% of the total.

As of the end of the second quarter China’s commercial bank non-performing loan (NPL) ratio had fallen to 1.76% – a reading lower than it was before the pandemic.

The provisions coverage ratio of China’s commercial banks stood at 193%, and its capital adequacy ratio was 14.47%.

The NPL ratio for China’s big six state-owned banks was 1.45%, while for the 12 joint-stock banks it was 1.42%.

“Banking sector risk still exists, and accumulated risk displays a trend of regional concentration,” said Sun.

“A small number of provinces have a high concentration of high-risk institutions, and we still need to focus on banking sector problems triggering a domino effect.

“Additionally, in the past two years financial sector risk has shifted from endogenous risk to exogenous risk, with industry risk, enterprise risk and fiscal risk all potentially transforming into financial risk.

“For this reason we need to accurately research and judge the factors behind financial risk, and avoid making the wrong prescriptions.”

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