China's banking system is healthy despite last year's explosive growth in credit and regulators could manage the risks, said Liu Mingkang, chairman of the Chinese Banking Regulatory Commission.
"We are confident that risks envisaged could be well absorbed," Liu said at a financial forum in Hong Kong.
Record bank lending in 2009 to support government spending on infrastructure and other projects under Beijing's stimulus package has led to fears of asset bubbles and huge bank losses if too many loans sour.
After handing out some 9.5 trillion yuan ($1.39 trillion) in loans last year, banks were expected to scale back lending to roughly 7.5 trillion ($1.09 trillion) in 2010, Liu said.
The total amount of loans will grow by as much as 18 percent in 2010 year over year, compared to nearly 32 percent in 2009, he said.
"We shall control, and we have controlled, the credit growth the whole year round," Liu said. "This year we will continue to control the pace and amount of the credit supply."
Already, "corrective actions" have been taken against banks that lent too much or made bad loans to root out "excessive" exposure, consumer credit card risks and other problems, he said.
Regulators were paying special attention to loans for local government projects and real estate. All banks have been ordered to "heighten their vigilance against an impossible, embedded credit risk," Liu said. New leverage and liquidity restrictions would be imposed, he added.
This month the government tightened restrictions to help curb riskier lending, dampen rising asset prices and ensure banks have enough money to handle losses.
Major banks were ordered to increase their reserve ratios by 0.5 percentage point to 16 percent. The central bank also raised interest rates on one-year bills, to help soak up extra money in the system.
By most measures, Chinese banks are among the world's healthiest at the moment. Not only are they flush with cash, but their bad loans, known as non-performing loans, stand at just 1.6 percent.
With China's economic growth pegged at a blistering 8 percent after a torrent of lending, banks will see a rise in bad loans in the coming years, though losses are expected to be manageable, said Alistair Scarff, head of Asia financial institutions research for Bank of America Merrill Lynch in Hong Kong.
Smaller commercial banks in China's cities are likely more at risk than are the country's heavyweight institutions, he said.
At the same time, China's modern banking system has yet to be fully tested.
China's banks have never faced a recession or big losses as profit-driven companies answerable to shareholders. What's more, advanced risk management systems and lending practices are a relatively new arrival at some banks.
"You have a banking system that has never really been through a down cycle," Scarff said. "This is the first time they're really facing these challenges as separate entities and modern financial institutions."
