Chinese banking system stable, says regulator

Yuan notes
Image caption China's government is trying to impose more discipline on its banks

China's banking system is stable, despite ongoing fears of a "credit crunch" spooking financial markets, according to the country's top regulator.

"The issue with tight liquidity in the interbank market has started to ease," said the head of the China Banking Regulatory Commission, Shang Fulin.

Fears over bad bank loans sent Chinese stocks to a four-and-a-half-year low last week.

Global markets also fell sharply.

Concern over bad loans in the economy led to a spike in interbank rates, which are the interest rates banks charge each other on a daily basis and a sign of how much faith that banks have in each other.

For example, a spike in the London-based Libor benchmark lending rate preceded the start of the 2008 financial crisis as US and UK banks refused to lend each other as the scale of bad debts became apparent.

"Recently some foreign institutions and industry players showed concern about risk in areas including local government debts," Mr Shang said on Saturday.

"As long as we apply the right risk-management measures, these risks are controllable."

Asset bubbles?

China has been trying to impose more discipline on its banks amid fears of bad loans impacting on its economy.

After the global financial crisis, Chinese banks - led by the state-owned institutions - lent out record sums of money in an attempt to help maintain China's rapid growth rate.

There are fears that the availability of easy money may have created asset bubbles - especially in the property sector.

And if China's growth slows fast, or if asset prices decline sharply, some borrowers may not be able to repay some of these loans.

"These days the issue with tight liquidity in the interbank market has started to ease," Mr Shang said. "This situation will not affect the overall pattern of stable operations in the domestic banking sector."

He added that Chinese financial institutions had excess reserves of 1.5 trillion yuan ($244bn; £160bn) as of 28 June.

On Friday, China's National Audit Office said that some state-owned banks had "violated" lending regulations, saying 28.4bn yuan of loans had been issued by some banks for projects without proper procedures or necessary guarantees.

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