China banking system 'stable' despite fund squeeze

China's bank regulator said that a recent liquidity squeeze would not hurt the stability of the banking system, in the latest government effort to soothe concerns over the funding shortage. For three weeks, funds have been in short supply on China's interbank market, and the interest rates banks charge to lend to each other have surged to record highs. Head of the China Banking Regulatory Commission, Shang Fulin, said the overall banking system had adequate liquidity, echoing comments by the central bank earlier in the week. "These days the issue with tight liquidity in the interbank market has started to ease," Shang told a financial forum in Shanghai. "This situation will not affect the overall pattern of stable operations in the domestic banking sector," he said, adding domestic financial institutions had excess reserves of 1.5 trillion yuan ($244 billion) on Friday. China's central bank chief Zhou Xiaochuan, speaking a day earlier, offered assurances that the People's Bank of China would use multiple tools to "ensure the overall stability of the market". There are worries tight liquidity among banks could prompt them to tighten lending, which threatens to carry over into the real economy. State media has reported that banks are struggling to meet their payment obligations as around 1.5 trillion yuan worth of wealth management products mature at the end of June. A top official of one of China's big four banks, the Agricultural Bank of China, said Friday that lenders should step up risk control and allocate financial resources to the right places. "The recent liquidity shortage in the market to some extent has something to do with overly high financial leverage and rapid expansion of shadow banking," Agricultural Bank deputy chairman Zhang Yun told the forum. Shang, the banking regulator, also called for more attention by domestic banks for risk control and liquidity management. But he played down risks from local government debts, another issue which has sparked worries over China's economy. "Recently some foreign institutions and industry players showed concern about risk in areas including local government debts," Shang said. "As long as we apply the right risk-management measures, these risks are controllable," he said. China's top auditor recently put outstanding debts held by 18 of the country's 31 provinces and major municipalities at 3.85 trillion yuan in 2012, the official Xinhua news agency reported Thursday.