China deems its financial system "healthy"

Lending and shadow banking risks still "manageable".

BBVA notes that the People’s Bank of China (PBoC) has released its annual financial stability report, stressing that, despite rising risks from lending in the real estate sector and growth of shadow banking, the overall financial system remains healthy. In particular, the PBoC flagged banks’ high capital levels and its own positive stress test results.

But BBVA cautioned that "While we would agree with the assessment of a healthy financial system at present, we do expect bank profits and non-performing loans to rise gradually over the next few years."

"Going forward, the report recommends a further strengthening of regulations in the shadow banking sector and the establishment of a deposit insurance scheme to facilitate a planned liberalization of interest rates. Such steps have been factored into our baseline expectations of reforms over the coming 3-5 years," BBVA added.