China has decided to delay the adoption of the new Basel II accord on banks' capital requirements, fearing it would damage local lenders' ability to compete with foreign rivals. The China Banking Regulatory Commission said China would continue to abide by the old 1988 banking rules. However, the commission said it supported the accord in principle, adding that it would be implemented in China a few years after taking effect in Group of 10 countries in late 2006. It went on to say that any offshore subsidiaries of mainland banks would comply with all local requirements to implement the new accord.
Analysts noted that China would even struggle to meet Basel I rules, adopted by more than 100 countries in 1992, which require a blanket minimum capital adequacy ratio of 8 per cent. Ratings agency Fitch estimated that China would need Yn3,900bn, equal to 35 per cent of GDP, to recapitalise its banks under Basel I.
Basel II would free up the capital reserves of many banks by allowing them to lower the risk rating of retail loans such as mortgages as well as corporate loans covered by certain credit ratings. Fitch analyst Arthur Lau said that Chinese banks, which have little mortgage lending, would be poorly placed to take advantage of these cost savings. Loans to SOEs, towards which Chinese banks' books are heavily skewed, would carry a 100 per cent risk rating under the new system compared with the 20 to 70 per cent ratings currently assigned to them.