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Chinese bank stress tests show lenders' resilience is "relatively high" says People's Bank of China

Stress tests on China's banking system show that it could withstand significant increases in bad debts or a sharp economic slow down, the People's bank of China (PBOC) has said, according to Reuters.

"The results of the stress test showed that the asset quality and capital adequacy of China's commercial banks is relatively high," the PBOC said in its annual financial stability report, Reuters said.

Stress tests are hypothetical financial scenarios designed to establish the financial resilience of banks.

The PBOC conducted stress tests at the end of last year on 17 domestic banks which are considered systemically important and which account for 61% of assets. Banks were subjected to worst case scenarios including a 400% rise in non-performing loans and significant changes to the exchange rate of the Renminbi (yuan). Other scenarios included economic growth slowing to 4% and a 15% point rise in non-performing loans of local governments and of industries which have excess capacity.

"Under light, middle and heavy stress scenarios, the banking system's overall capital adequacy would remain at a relatively high level; even the most serious scenario would not see the capital adequacy ratio fall below 10.5 percent," the PBOC report said, according to Reuters.

The tests found that three banks would fail to meet China's liquidity ratio requirements of 25% or higher in a worst case scenario, according to Reuters, however the PBOC did not identify those banks.

The stress tests did not scrutinise China's smaller commercial and rural banks. Although these smaller lenders are regarded as more vulnerable to economic slow-downs and any increase in bad debt, they are not considered to pose a significant systemic threat, said Reuters.

According to the China Banking Regulatory Commission, the ratio of non-performing loans of China's banks sat at 1% at the end of December, representing its highest level in two years, Reuters said.

China experienced 7.4% economic growth year-on-year in the first quarter of this year – the lowest quarterly rise since the third quarter of 2012, said the state press agency Xinhua. That compares to 7.7% in the fourth quarter of last year, according to the Financial Times.

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