In his first public comments since the country's worst cash crunch in at least a decade, China's banking regulator said lenders would not be disrupted because they had built up double the cash reserves that were usually required.
Banks had about 1.5 trillion yuan ($267 billion) of cash reserves as of Friday that could be used for payment and settlement needs, Shang Fulin, chairman of the China Banking Regulatory Commission, said in Shanghai on Saturday.
"The tight liquidity condition on the interbank market has been easing in the past few days," Mr Shang said. "This type of situation won't affect the banking sector's smooth operations."
Chinese bank shares rose on Friday after People's Bank of China governor Zhou Xiaochuan pledged to maintain market stability following a cash squeeze that sent money market rates to a record.
The cash crunch on the interbank market exposed deficiencies in commercial banks' liquidity management and their business structures, Mr Shang said.
The one-day repurchase rate touched a record 13.91 per cent on June 20 before tumbling on signs that targeted injections of funds were being used to ease the cash crunch.
The slowdown in economic growth in China remained within a "reasonable" range and the economy was stable, Mr Zhou said on Friday in his first comments since the cash crunch. He also sought to soothe concerns of a further deceleration of growth, saying he was fully confident of China's economic prospects and financial system.
China's banks had been stable and healthy this year, the CBRC's Mr Shang said. For every yuan of soured assets at the end of May, they had set aside 2.8 yuan as the industry's non-performing loan ratio rose to 1.03 per cent, he said.
The nation's economy was in a transitional phase and risks associated with a slowdown in economic growth, loans to local governments and to the property sector were controllable, Mr Shang said.
China's banks had 9.59 trillion yuan of outstanding loans to local government financing vehicles at the end of March, while loans to the property industry stood at 13 trillion yuan at the end of April, he said. The nonperforming loans ratio was at 0.14 per cent at the end of March.
A recent review by the National Audit Office indicated that total local government direct and guaranteed debt might have risen 13 per cent to 12.1 trillion yuan by the end of 2012 from the end of 2010, according to Moody's Investors Service, citing its own calculations based on data in the auditor's report that showed a 13 per cent increase in the debts of a sample of 36 local authorities.
The banking sector's non-performing loans rose 33.6 billion yuan in the three months to March 31, to 526.5 billion yuan. That sixth straight quarterly gain marked the longest deterioration streak in at least nine years, according to data released by the banking regulator.
"Some have compared our local government debt to European debt, but our debts are accumulated for production not for consumption. Most of them have assets as guarantees and the overall risk is controllable," Mr Shang said.
The value of wealth-management products sold by banks was 8.2 trillion yuan at the end of March, he said. More than 70 per cent of the funds raised through wealth-management products had been invested in the real economy.
The CBRC would ask banks to isolate their wealth-management businesses from their loan businesses as it sought to tighten control of wealth-management products, he said.