CHINESE banks must conduct regular stress tests and improve analysis to detect risks that may not be reflected in the falling ratio of bad loans and better loss provisioning, the country’s top banking regulator wrote in an article published yesterday.

    China Banking Regulatory Commission chairman Shang Fulin said banks must ask borrowers to increase collateral if underlying asset values fall and that lenders must take advantage of fast growth and high profits now to make more aggressive loss provisions.

    “Chinese banks’ capital adequacy ratio and provisions have increased substantially in the past few years and the non-performing loans ratio has fallen significantly,” Shang, who took charge of the banking sector in November, wrote in Caijing magazine.

    “But we must know there are still some hidden risks behind all these good numbers,” he warned.

    Investors’ worries about under-reporting of bad loans, especially those arising from 10.7 trillion yuan (US$1.7 trillion) of local government debts, have weighed down Chinese bank shares.

    Shang also said that banks must improve their capital management, a lesson from the fast credit expansion in 2009 and massive fundraising from the stock and bond market in the subsequent years.

    “Such forced capital replenishment after asset expansion is clearly not sustainable,” Shang warned.

    This year, the central bank has sent out its routine warning early in the year against a lending spree, but sources said last week that China aimed for 8 trillion yuan in new local-currency loans to protect growth, up from 7.5 trillion yuan last year.

    They will first meet demand from projects already under construction, small businesses and the agricultural sector, Shang said.(SD-Agencies)