(This article was first published on China Business Law Journal column"Banking & Finance",authorised reprint)

Since the beginning of 2018, CBRC upgrades regulatory by promulgation of a series of new regulations, including the Interim Measures for the Administration of Equities in Commercial Banks (《商业银行股权管理暂行办法》), the Measures for the Administration of Entrusted Loans of Commercial Banks (《商业银行委托贷款管理办法》), and the Circular on Further Deepening the Rectification against Market Chaos in the Banking Industry (《关于进一步深化整治银行业市场乱象的通知》). Targeting especially at interbank business, wealth management and off-balance-sheet transactions as well as shadow banking, the 2018 corrective actions of CBRC will continue to highlight deleveraging, delinking and elimination of passageway business in the financial system.

In the government work report made on 5 March 2018, Premier Li Keqiang proposed a prudent monetary policy for 2018. Featuring moderate tightening and relaxation, the policy will be aimed at maintaining reasonably steady liquidity and raising the percentage of direct financing, especially equity financing.

In order to provide commercial banks with further supports in expanding channels of supplementing their capital, enhancing the soundness of their banking systems, and strengthening banks' capabilities to support the real economy, the CBRC, PBOC, China Securities Regulatory Commission (CSRC), China Insurance Regulatory Commission (CIRC) and State Administration of Foreign Exchange (SAFE) jointly issued the Opinions on Providing Further Supports for Capital Instrument Innovations of Commercial Banks (No. 5 Document)(《关于进一步支持商业银行资本工具创新的意见》) in January 2018.

Firstly, channels for issuance of capital instruments shall be broadened. The regulators will support commercial banks to issue capital instruments through a diverse range of channels so that the scale of offered capital instruments may grow steadily by taking maximize respective advantages of domestic and foreign financial markets and making effective use of domestic and foreign market resources.

Thirdly, investor base shall be expanded. On the precondition of risk prevention, the regulators will develop policies for institutions, such as social security funds, insurance companies, securities institutions, fund companies to invest in capital instruments of commercial banks, thereby expanding the base of eligible investors in these instruments.

On 6 March 2018, CBRC issued the Circular on Adjusting the Regulatory Requirements for Loan Loss Provision of Commercial Banks (No. 7 Document)(《关于调整商业银行贷款损失准备监管要求的通知》). Key contents of the No. 7 Document include adjusting the provision coverage ratio from 150% to 120%-150% and the loan provision ratio from 2.5% to 1.5%-2.5%. Wang Zhaoxing, Vice Chairman of CBRC, says that benefiting from good performance in the last couple of years, banks have set aside abundant loan loss provisions, pushing provision coverage ratio of the whole industry to 180%, a figure that is much higher than the international level. That is why CBRC adjusts the provision coverage ratio to lower requirements moderately. The move is expected to help accelerating disposal of existing non-performing loans so that banks will have more capital for supporting the development of the real economy. 

Meanwhile, the downward adjustment will also be helpful for commercial banks to liquidize their capital. Using the incremental liquidity to support new industries, economic drivers and technologies, commercial banks will be better positioned to serve the real economy. Actually, the fact that regulators dare to announce this policy at this moment reveals their belief that the bad debts of the banking industry in China have been fully disclosed and the problems are controllable. Now the top challenge for the banking industry is to properly dispose of or write off the bad debts that have been revealed.