The People's Bank of China insists that China’s cash-flush banks lend more money to productive sectors of the economy.
The central bank said the nation’s 17 commercial banks, including the Big Four, all have more than enough funds to withstand an economic slowdown.
Should a worst-case scenario where bad loans jump by 400% occur, the capital adequacy ratio of the whole banking sector may drop to 10.9% from 12.3%, as discovered by the central bank’s stress tests.
The central bank said banks should actively respond to China's moves to ease restrictions on the interest rate market that give lenders greater flexibility to set lending and deposit rates.
It urged commercial banks to lend more to green energy, environmental projects and the services industry, but warned them to control risks in property and local government loans.
These reforms are widely seen as squeezing the fat net interest margins of state-backed lenders in an effort to encourage better differential pricing of risk and greater allocation of capital towards higher return economic activity.
The admonition follows the government’s recent release of alarming data showing the economy in its worst quarterly growth in over three years.
China's economy slowed for the sixth straight quarter between April and June, growing just 7.6% compared with the same three months a year ago. The extended growth slowdown is leading some analysts to believe the government might unleash another stimulus package.
"China's banking industry is likely to face a more complicated environment in 2012, with market competition becoming more intense and the task of transforming its business model more challenging," the central bank said.
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