China's banking regulatory is trying to triple lock the banking sector against risks. Photo: iStock

China’s banking watchdog has always had a loud bark. But now it is starting to bare its teeth in a move to clamp down on excessive debt, off-balance sheet activities and market misdemeanors in the financial sector.

Since March last year, the Banking Regulatory Commission has uncovered nearly 60,000 cases of fraud involving 17.7 trillion yuan (US$2.72 trillion). Fines totaling 2.9 billion yuan were slapped on 1,877 banking operations, figures released this week by the CBRC highlighted.

Topping the ‘bad boys’ list was the China Guangfa Bank, which has its headquarters in Guangzhou.

Part of a major investigation by the CBRC, the commercial banking corporation was found guilty of fabricating guarantee documents, or Letters of Credit, and hiding bad assets before being fined more than $100 million.

Debt problems and corruption inside the banking system are nothing new. For Zhou Xiaochuan, the People’s Bank of China Governor, it has become a recurring theme in speeches and articles.

“High financial leverage and liquidity [problems], the credit [exposure of] financial institutions, cross-market, cross-regional shadow banking and crime are the major financial risks facing China today,” he said in 2017.

“Under pressure from multiple factors, both at home and abroad, the risk areas are wide-ranging, and are characterized by covertness, complexity, suddenness, contagion and danger,” Zhou added with a theatrical dash.

His comments came as a prophetic precursor to last month’s report from the International Monetary Fund.

In its first in-depth look at China’s financial system for six years, the IMF highlighted concerns about the country’s banking sector after “stress tests” found four-fifths of the banks were “vulnerable.”

“Beijing should put less emphasis on growth, beef-up regulation and improve banks’ finances,” it stated.

Up to 27 of the 33 banks tested needed to raise more funds, despite complying with Basel III regulations, which were brought in after the global financial crisis in 2009. Their total assets stood at $26 trillion, the IMF pointed out.

“[China’s] ‘big four’ banks had adequate capital [but] large, medium, and city-commercial banks appeared vulnerable,” it added.

At the bottom of the heap, the nation’s smaller banks are likely to go through a torrid time this year. There are more than 4,000 scattered across the world’s second-biggest economy, but many look certain to merge and some will face a shotgun marriage of convenience.

They have been squeezed over the years by the industry’s main players, a cooling property market, tighter money supply and aggressive new regulations.

“This shows regulators are unrelenting in deleveraging efforts,” Richard Cao, an analyst at Guotai Junan Securities in Shenzhen, told Bloomberg News.

But the risks are still there and they have raised alarm bells among China’s crucial trading partners. Last October, the Reserve Bank of Australia warned in its Financial Stability Review that “financial risks in China remain high.”

The People’s Bank of China, or central bank, and regulators have been quick to acknowledge this by taking steps to combat the problem. Still,  the threat is a clear and present danger to the financial system.

“The more that leverage and risky lending grow, the more likely that China’s economic transition will include a significant disruption of some form,” the Reserve Bank of Australia pointed out in its review.

Coping with this conundrum looks certain to give central bank governor Zhou more than a few sleepless nights in the next 12 months. Hopefully, when he does close his eyes he will avoid drifting into a financial nightmare.

At least, he has a banking watchdog that is not frightened to bare its teeth. Sweet dreams are made of this for global bankers.

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