China vows to rein in banking risks

China's banking regulator vowed on Monday to take steps to rein in banking risks in 2014 while outlining plans to set up private banks to boost competition in the industry.

Three to five private banks will be set up under a pilot scheme this year, the China Banking Regulatory Commission (CBRC) said in a statement posted on its website.

The CBRC will guide private capital to join the -restructuring of financial institutions as a means to offer private capital more access to the banking sector, the statement said.

The banking regulator also said that it will take measures to resolve lending risks linked to local government financing vehicles and tighten rules on wealth management products.

Banks must control risks associated with lending to the property sector and industries with excess capacity, it said.

The State Council has published guidelines -strengthening regulation of risky off-balance-sheet lending, according to a copy of the council's Document 107, dated December 11, obtained by Reuters.

The document says shadow banking is a "beneficial" and "inevitable" consequence of financial development, but calls for tighter regulation of banks' off-balance-sheet lending.

Trust companies - the biggest non-bank players in what's called shadow banking - should return to their original purpose as asset managers and not engage in "credit-type" business, according to the document.

Shadow banking has grown rapidly in China since 2010, when banks began running up against limits on expanding loans through traditional channels.

The latest guidelines follow a set of regulations issued in March, which limited the amount of shadow bank loans that banks could package into wealth management products.

If strictly implemented, the deleveraging push could put China's economy on a more sustainable long-term path by reducing the risk of a bad-debt crisis. But short-term growth would likely fall as a reduction in credit growth spurs a fall in spending, experts said.

"One can predict that growth of total social financing will slow and fixed-assets investment will also slow," said Liu Yuhui, a scholar at the Chinese Academy of Social Sciences.

"If this isn't accompanied by various forms of debt restructuring, some sectors may see their funding chains broken and there could be defaults," he said.