China's top banking regulator has proved through decisive action that oversight in the banking sector is to be tightened and that regulatory standards are to become stricter.

The China Banking Regulatory Commission (CBRC) has fined the Chengdu branch of the Shanghai Pudong Development Bank (SPD Bank) 462 million yuan ($72 million) for illegally covering up bad loans.

The SPD Bank's branch was found to have offered credit worth 77.5 billion yuan ($12.1 billion) to 1,493 bogus firms via illegal means in exchange for repayments from enterprises to cover non-performing loans.

According to the CBRC, such organized malpractice reveals poor internal regulation, a low sense of compliance and an excessive focus on business expansion.

This comes after a 722-million-yuan ($112.8 million) fine was imposed on the China Guangfa Bank in December 2017 for offering illegal guarantees on defaulted corporate bonds.

The move signaled a continuation of the hard stance taken by the government following a tough financial cleanup in 2017. The CBRC last year imposed nearly 3 billion yuan ($468.9 million) in fines on banking institutions, and punished 270 individuals.

"China will step up its crackdown on the banking sector, while improving its regulatory regime in 2018," said Zeng Gang, a research fellow at the Institute of Finance and Business under the Chinese Academy of Social Sciences.

China has repeatedly vowed to clean up disorder in its banking system, stressing that long-term efforts are needed to control banking sector chaos.

"Banking shareholder management, corporate governance and risk control mechanisms are still relatively weak, and the root causes that create market chaos have not fundamentally changed," the CBRC said in a statement on its website.

The regulator said violations in corporate governance, property loans and the disposal of non-performing assets will be punished more severely, and announced that it would strengthen risk control in interbank activities, financial products and off-balance sheet business.

"Bringing the banking sector under control will be long, arduous and complex," it said.

Meanwhile, supervision over the regulators is becoming significantly stricter as well.

While the head of the SPD Bank's Chengdu branch was banned from working in the banking sector, local banking regulatory officials and SPD Bank senior management have also been punished for their negligence of duty.

In addition, the CBRC expects to optimize the market environment through stricter regulations, prompting steadier development in the banking sector and better serving the real economy.

More capital was redirected into the real economy as the financial sector saw constant leverage ratio drops in 2017, with over 100 banks offering to reduce their balance sheets, CBRC Chairman Guo Shuqing said earlier in an interview with the People's Daily.

In 2018, the banking regulator will further support China's innovation driven strategy by proceeding with inclusive financing and bringing down financial costs, Guo said.

While risks in the financial system are manageable, Guo warned against hidden dangers of "gray rhinos" and "black swans" in safeguarding China's financial stability.

"Shadow banking and cross-selling in financial services require urgent attention, as they are most likely to trigger financial risks within the system," said Lian Ping, chief economist with Bank of Communications.

The Central Economic Work Conference held last December listed defusing major risks as one of the "three tough battles" the country will fight over the next three years.

"We are sure that stricter banking oversight will provide the necessary foundation for winning the battle of preventing major financial risks," said Guo.

This is an edited excerpt of an article originally published by Xinhua News Agency

Copyedited by Laurence Coulton

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