Capital adequacy requirement to be set higher than global standard, reducing risk

China's three major policy banks officially began a massive reform process on Sunday to diversify financial services in support of economic growth.

The reforms include redefining functions and tightening capital adequacy requirements.

Reform plans of the China Development Bank, Export-Import Bank of China and the Agricultural Development Bank of China have been approved by the State Council, the country's cabinet, according to an official statement published online.

After the reforms are in place, the floor for the three banks' capital adequacy will be 10.5 percent, more than the 8 percent required by Basel III, a global, voluntary regulatory framework on bank capital adequacy, an official from the People's Bank of China said, asking not to be named.

In the past, there was no requirement on the policy banks' capital adequacy ratio, making it difficult to supervise credit risks, the official said.

"The whole reform process will be accelerated, and it will be completed soon," he said.

The CDB, the country's second-largest bond issuer after the Ministry of Finance, will be transformed into a "development-oriented financial institution" and will restructure its management policy more toward a market-led pattern, the online statement said.

That means the bank's loans will continue to enjoy a State-backed credit rating, but the bank will retain some rights to choose lending targets and to chase high returns in a competitive environment with other commercial banks.

The financial services arm of CDB will support the nation's development strategy based on a market-oriented approach. Loan principal will be guaranteed, while allowing room for a small profit, according to the statement.

The reform framework was first mentioned by Chen Yuan, founder of CDB and a former governor.

By the end of 2014, the bank's total assets had reached 10.1 trillion yuan ($1.6 trillion), with a nonperforming loan ratio of 0.63 percent. A large part of the CDB's lending is for construction of railways and highways, along with the renovation of shantytowns.

The other two banks will remain as noncommercial entities. Ex-Im is responsible for raising funds to support Chinese enterprises' "going out" strategy, and the ADBC provides financial services to major agricultural construction projects, the government statement said.

Those two banks had outstanding loans of more than 5 trillion yuan to support the nation's special projects at the end of last year.

Guo Tianyong, an economist at the School of Finance at Central University of Finance and Economics, said the coming reform is a "breakthrough".

"Clear requirements of capital adequacy will help to control potential credit risks and push the banks to improve their governance," Guo said.

After the reform is in place, funds from those banks will be used more efficiently to support key industries, such as the high-end equipment manufacturing industry, and avoid redundant construction in sectors with overcapacity, he said.

In March, Fitch Ratings Inc, a global credit rating agency, gave the three banks a straight "A+" with a stable outlook, since the credit is guaranteed by the government.

The agency said these banks are playing significant roles in China's economic development. Their profitability and capital level are below other commercial banks, but their liquidity risk is less.