The China Banking Regulatory Commission (CBRC) announced new regulations on capital adequacy on February 27 in a bid to enhance risk management of the banking sector.

Under the stricter new regulations, which take effect on March 1, Chinese commercial banks will have lower capital adequacy ratios than the figures calculated under existing rules, the commission said.

To give commercial banks more time to replenish their capital base, the CBRC has set the deadline for meeting the new requirements at January 1, 2007.

"During the transitional period, commercial banks that fail to meet the requirements must formulate workable capital replenishment plans, and the China Banking Regulatory Commission will supervise the implementation and take regulatory measures accordingly," a CBRC spokesperson said.

Most of China's commercial banks fail to meet the 8 percent minimum requirement for capital adequacy even under the older rules, which stands as a major obstacle hindering their reform efforts.

The banks are required to set aside part of their profits as bad loan provisions, but few of them have been able to strictly do that. The huge number of non-performing loans means, in some cases, that some banks have to set aside more money than the profits they make.

Under the new rules, the capital adequacy ratio - capital divided by risk weighted assets - is calculated after a full deduction of bad loan provisions. The rules end some favorable treatment in assigning risk weights to loans given to key state-owned enterprises and some types of mortgage loans.

(China Daily February 28, 2004)