Due to the recent defaults of several Chinese companies and growing concern over growing credit risk, the Chinese banking regulator will be conducting stress tests on the Chinese banking system. The China Banking Regulatory Commission sent regional and national banks guidelines and notified them that the stress tests will be done in a timely manner.
According to the guidelines, “The tests are intended to analyze the impact of unfavorable situations in individual banks and the banking system, and urge banking financial institutions to make emergency plans.” The guidelines warned banks against offering distressed borrowers new loans to repay maturing ones in order to hide the scale of their bad loans. They also urged banks to cease lending to LGFVs (Local Government Financial Vehicles) and other industries at risk for overcapacity like the steel and property-trading companies.
Unlike stress test results in the US, these test results won’t officially be released to the public, though it seems more than likely that they will eventually get leaked to the press. It will be interesting to see which banks are offering risky loans if and when this happens, as well as to see the effect these potential credit defaults will have on the Chinese economy.