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Moody's sees new rules for Chinese policy banks as credit positive for sovereign

Effective implementation of China's new rules on capital management, corporate governance and risk controls for China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China will be credit positive for the sovereign, Moody's said.

If effectively implemented, the rules will help mitigate the potential contingent liabilities associated with the three policy banks' lending to social projects with low economic returns and in higher-risk countries, particularly under China's Belt and Road initiative, the rating agency said.

The China Banking Regulatory Commission issued the rules in mid-November. While the rules require the policy banks to strengthen capital management, corporate governance and risk controls, they do not detail the specific measures that will be implemented, Moody's noted.

At the same time, Moody's said tighter regulation of policy banks could constrain their contribution to supporting economic growth, through financing investment in particular for urbanization, social and rural development. Further, the banks' focus on areas of domestic social policy could elevate sovereign credit risk, given the typically lower economic returns of such projects, the agency added.