The China Banking Regulatory Commission (CBRC) declined requests from the country’s largest banks to relax rules on bad-loan provisions, following a separate move to curb the shadow banking sector (see article: CHINESE STOCKS SINK AS FEARS OF WEALTH-MANAGEMENT CURB), according to people familiar with the matter.

The CBRC’s stance means that bank may need to restore bad-loan buffers at the expense of profitability.

Higher provision leads to lower profits, which will be translated into lower valuation – bad news to equity investors, said analyst at Commerzbank AG He Xuanlai. However, He added, CBRC places stability of the financial system as priority.

Over the past eight years, bank credit has roughly doubled as proportion of GDP, reaching 243% as of 2015, according to Fitch Ratings. Slowing profit growth and rising non-performing loans pose an adverse effect for Chinese banks’ ability to return money to shareholders, which impels the country’s largest lenders to lobby CBRC to cut bad-loan coverage ratio by 20 to 30 percent points from the current 150%.

However, CBRC is not considering granting a reduction at least for now, according to the source.