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China’s Liu Sees Challenges to Maintain Healthy Bank Industry

July 20 (Bloomberg) -- China faces many challenges in its efforts to maintain the health of the banking industry, including risks from local government financing vehicles, property loans and industrial overcapacity, bank regulator Liu Mingkang said.

While the economy is moving in the “expected direction,” structural changes pose challenges for the country, Liu said in a statement posted on the website of the China Banking Regulatory Commission today after a meeting of officials at the watchdog to discuss the country’s economic situation.

Growth in the world’s third-largest economy slowed to 10.3 percent in the second quarter from 11.9 percent in the previous three months as Premier Wen Jiabao ordered curbs on real-estate and industrial lending. The nation’s policy makers are grappling with the risks posed by last year’s $1.4 trillion credit boom that fueled the nation’s comeback from the global recession.

“The current macroeconomic financial situation is still complex and changing, the sustained healthy development of the banking industry faces a multitude of challenges, especially risks in the areas of government financing vehicles, real estate and sectors with overcapacity, which need attention,” Liu said.

The regulator reiterated previous orders for banks to step up scrutiny of lending to local government financing vehicles and to curb credit to new investment projects run by local authorities after outstanding loans to these entities surged 70 percent last year to 7.38 trillion yuan.

Stress Tests

Banks must adhere to restrictions on lending to property developers and mortgage loans to individuals, Liu said. They should also conduct “stress tests” on their lending for real-estate projects and other sectors related to property to ensure they properly understand and can cope with the risks they’ve taken on, the regulator said.

China’s government is targeting 7.5 trillion yuan ($1.1 trillion) of new loans this year, a 22 percent reduction from last year’s record, to cool the property market and limit the resurgence of bad loans while sustaining economic growth.

Fitch Ratings last week estimated that bank lending in the first half of the year was 28 percent higher than the official 4.6 trillion yuan ($679 billion) figure as loans were repackaged into off-balance sheet investment products. The regulator imposed a temporary ban on such “informal securitization” earlier this month, according to Fitch.

China’s five largest state-controlled commercial banks, which include Agricultural Bank of China Ltd., plan to raise as much as $53.5 billion to replenish capital after last year’s lending surge weakened their capital adequacy ratios. Agricultural Bank this month sold $19.2 billion of shares in the world’s largest initial public offering in four years.

To contact Bloomberg News staff of this story: Luo Jun in Shanghai at jluo6@bloomberg.net

To contact the editor responsible for this story: Brett Miller at bmiller30@bloomberg.net

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