China Vows to Toughen Rules on $38 Trillion Banking Industry

(Bloomberg) -- China's banking regulator pledged to continue its crackdown on malpractice in the $38 trillion industry in 2018, vowing to tackle everything from poor corporate governance and violation of lending policies to cross-holdings of risky financial products.

The China Banking Regulatory Commission unveiled its regulatory priorities for the year in a statement on Saturday. They include:

• Inspecting the funding source of banks' shareholders and ensuring they have obtained their stakes in a regular manner
• Examining banks' compliance with rules restricting loans to real estate developers, local governments, industries burdened by overcapacity, and some home buyers
• Looking into banks' interbank activities and wealth management businesses.

The statement comes after China's financial regulators started 2018 with a flurry of rules to plug loopholes uncovered in last year's deleveraging campaign, showcasing their determination to limit broader risks to the financial system. Still, analysts have warned that the moves will make it more difficult for companies to obtain financing from loans, equities and bonds and could undermine economic growth.

‘Regulatory Storm'

The “CBRC's regulatory storm continues” with the weekend announcement covering almost all aspects of banks' daily operations, Bocom International Holdings Co. analysts Jaclyn Wang and Hannah Han wrote in a note. “We believe challenges for smaller banks in the current regulatory environment remain high,” they wrote, noting that curbs on off-balance-sheet lending and interbank activities may drag on profitability.

Read more on China's new year rules to reduce systemic risks

Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. rose in Hong Kong on Monday morning, while smaller lenders including Huishang Bank Co. and Bank of Tianjin Co. fell.

While the CBRC will allow a grace period for rectifying some irregularities, any new business after May 1, 2017, must be corrected or the bank will face punishment, according to the statement. Banks are required to submit an initial self-inspection report on their 2017 operations by March 10, and another two reports by June and December detailing their progress.

“CBRC's new rule basically covers every corner of the banking system and shows their increasingly tougher stance toward financial turbulence," China Securities Co. analysts led by Huang Wentao wrote in a note. “Banks, especially smaller ones, should proactively adjust their business models.”

--With assistance from Helen Sun and Alfred Liu

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

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

©2018 Bloomberg L.P.

With assistance from Jun Luo