FINANCIAL PROSPERITY: The central bank report says China's commercial banks including the Industrial and Commercial Bank of China made juicy profits in 2009 (CFP)

On September 17, the People's Bank of China, the central bank, released the 2010 China Financial Stability Report, offering a glimpse of China's financial landscape.

Nearly two years after the breakout of the global financial crisis, the Chinese economy is moving quickly out of its shadow. This resilience has laid solid groundwork for the financial industry to pick up impetus, though challenges remain, said the report.

A major component of the financial industry—the banking sector—burst with vitality in 2009, with both profitability and asset quality on the rise. But, after a significant lending surge last year, the capital adequacy ratio of the lenders experienced a slight drop.

In 2009, the 17 major commercial banks generated after-tax net profits of 492.6 billion yuan ($72.4 billion), surging 12.37 percent year on year. Their bad-loan ratio stood at 1.59 percent last year, compared with 2.41 percent in 2008.

The securities and insurance industries roared ahead as well, as markets scaled up and trading stayed buoyant.

But financial security is far from guaranteed. The local governments raised a pile of debt through hidden financing vehicles, igniting concerns over solvency. Another cause for caution is swelling overdue credit card debt as cardholders are falling behind their monthly obligations.

The country's outstanding non-performing debt through personal credit cards was 7.8 billion yuan ($1.15 billion) at the end of 2009, an increase of 3.5 billion yuan ($515 million) from a year ago.

China also has a lot to do to curb lending to highly polluting and energy-guzzling industries and soothing the financial difficulties of the agriculture sector and small businesses, said the report.

Meanwhile, the aftershocks of the financial meltdown are rippling around the globe, requiring China set up firewalls against possible risks.

Global economies are putting brakes on their monetary stimulus at varied paces, destabilizing the world's financial health. The European sovereign debt crisis also cast an ominous shadow over prospects for global economic recovery. The challenge must be addressed by trimming government deficits in the euro zone, said the report.

Many developing economies have experienced a resurgence of capital inflow, due to better growth prospects and relatively low interest rates. But with this comes the risk of inflation and asset bubbles. More disturbing, though, is the possible abrupt withdrawal of capital, which has the potential to send developing economies into an abyss.

Consistent stimulus

While the Chinese economy is staging a swift rebound, a bright outlook is not fully assured. The foundation of domestic demand remains shaky and private investments have yet to become a significant driver of growth.

The central bank reaffirmed its commitment to its proactive fiscal policy and moderately loose monetary policy as an effort to keep growth engines in top gear.

Despite such a firm commitment, a debate is heating up about whether China should raise interest rates in response to proliferating inflationary jitters and the housing frenzy.

The consumer price index (CPI), an effective gauge of inflation, rose 3.5 percent year on year in August, hitting a 22-month record, said the National Bureau of Statistics.

Meanwhile, real estate bubbles currently in the making across the nation have stretched nerves of policy-makers. House prices in 70 large and medium-sized cities rose 9.3 percent in August year on year, despite a heavy government clampdown on the property market.

On the monetary front, the central bank has required commercial banks to slow their paces of lending, and has also raised the reserve requirement ratio three times this year, pinching the banks' ability to lend.

Economists are divided over whether more aggressive tightening is already in the pipeline.

"China's one-year deposit interest rate now stands at 2.25 percent, well below the current inflation level," said Guo Tianyong, Director of the Research Institute of China's Banking Industry of the Central University of Finance and Economics. "Such negative interest rate in real terms is hurting the wealth of the depositors, and the only solution is to hike the interest rate."

With growth holding up, China now has an opportunity to take its foot off the economic accelerator, he said.