China's New Banking Regulator Chief Faces Daunting Challenges

  • Rise in shadow banking and bad loans are among risks
  • Guo Shuqing said to head China Banking Regulatory Commission

China has appointed Guo Shuqing as the new head of the banking regulator, according to people familiar with the matter. Having spent much of his life working on transforming the nation’s financial system, Guo, 60, faces daunting tasks ahead as he takes on oversight of the world’s largest banking industry by assets. Below are five charts highlighting some of the biggest issues.

1. Shadow Banking

Shadow banking is now in every segment of China’s financial system, prompting authorities to work together to address growing risks. The central bank and the securities, banking and insurance regulators are drafting new rules for asset-management products that have swollen to almost $9 trillion as of June 30. So-called wealth-management products issued by banks surged 30 percent last year, making them the largest component of the banking system that exists largely outside of lenders’ balance sheets.

2. Liquidity Risks

Banks have increased reliance on funding their operations by borrowing from each other with short-term instruments such as negotiable certificates of deposit, raising risks of a liquidity shock. Difficulty selling the securities is fueling concerns that smaller lenders could face cash crunches and even miss payments.

3. Profit Slowdown

China’s largest lenders are expected to post their first decline in annual profit in more than a decade. Earnings growth has slowed in recent years because of swelling bad loans and pressure on lending margins.

4. Funding Costs

Policy makers’ recent drive to reduce financial-system risks is squeezing banks. Caught between the central bank’s intensifying efforts to raise short-term borrowing costs, and benchmark interest rates that haven’t moved since 2015, Chinese lenders have few options but to absorb much of the higher costs.

5. Bad Loans

China’s economy is growing at the slowest pace in a quarter century, adding urgency to the banks to clean up bad loans. Official figures on soured debts are widely believed to understate the true scale of the problem, with CLSA Ltd. estimating the non-performing loan ratio at 15 percent to 19 percent for 2015 -- about 10 times higher than the official 1.67 percent.

— With assistance by Jun Luo

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