China's top banking watchdog said on Thursday that the nation's commercial lenders had maintained ample liquidity so far, but warned rising liquidity due to record lending this year could pose a risk to the banking system as a whole.

As of the end of September, banks' average liquidity ratio, or cash held by these banks as a proportion of deposits, was 41.7 percent, well above the industry requirement of 25 percent, the China Banking Regulatory Commission (CBRC) stated on its website yesterday.

"Chinese banks' liquidity is high at present, and there is plenty of money in the inter-bank lending market," it said, but underlined the necessity of enhancing liquidity risk management against the backdrop of the global financial crisis.

Analysts, however, pointed out that the liquidity ratio alone was not the only barometer of a bank's health, and said only when other indicators, such as the loan-to-deposit ratio and cash reserve ratio are taken into account, will the liquidity issue become more pressing for Chinese banks.

"The loan and assets expansion of some Chinese banks, especially medium-sized lenders, was excessively fast, which will sow the seeds for future liquidity risks and rising bad loans," said Fu Lichun, an analyst at Southwest Securities.

For example, China Minsheng Banking Corp, the nation's first listed private lender, has seen its average net profit jump by 18.11 percent in the first three quarters from a year ago, driven by a galloping 42-percent lending growth during the period. But the rapid loan expansion also propelled the bank's loan-to-deposit ratio to a record 80 percent, exceeding the industry requirement of 75 percent, Fu said.

In response to the nation's call to prop up the slowing economy amid the global financial crisis, Chinese banks advanced 8.67 trillion yuan (US$1.28 trillion) in fresh loans in the first nine months of the year, more than doubling the amount they issued during the same period last year, causing concern that this may lead to a commensurate rise in bad debts after the lending spree and help form an assets bubble.

The CBRC recently unveiled a slew of rules to govern domestic commercial banks' lending practices, bringing loans for fixed asset investment, corporate working capital, and personal use under its regulatory roof, in an effort to safeguard the healthy development of the banking sector.

In the guidelines the CBRC released yesterday to direct banks on how to manage their liquidity risks, it urged commercial lenders to conduct stress tests on a quarterly basis, which it said could help them identify existing and potential risks in time.

Commercial banks' bad loan ratio has continued to drop, falling to 1.66 percent as of the end of September from the 2.42-percent at the beginning of the year, while the total value of non-performing loans was 504.5 billion yuan, down 55.8 billion yuan from nine months ago.

(China Daily October 30, 2009)