Beijing has for first time set a deadline for its implementation of the Basle II accord on banking regulation [which forces banks to improve their ability to identify, measure, price and disclose risk in their lending books], amid growing pressure on Chinese lenders to toughen up their risk management systems.

Big Chinese banks with large overseas operations, such as Industrial and Commercial Bank of China, will have to implement the new standard by 2010. Banks can apply for a deadline extension of up to three years, according to the China Banking Regulatory Commission, the bank watchdog. In what is seen as an ambitious move, the Chinese regulator has been pressing big local lenders to start developing the most sophisticated credit risk model under Basle II, known as advanced internal ratings-based system. Chinese banks will have to invest millions of dollars in data collection systems that would, after several years, allow them accurately to predict defaults.

Critics regard Basle II as a regulatory nightmare that will impose excessively high costs on smaller banks, particularly in Asia. Analysts believe the current composition of Chinese lending books could require local banks to increase their regulatory capital. Chinese banks have significant exposure to risky corporate loans and a growing exposure to credit card loans, which have a higher capital adequacy requirement under Basle II. "… Advocates of the reform believe increased regulatory pressure to beef up risk management expertise will make the international banking system more stable and lead to business benefits for individual banks. …"

South China Morning Post notes that "… This year, Hong Kong banks were among the first in the world to comply with Basel II, which takes into account a bank's operational risk, as well as credit risk, setting a standard that better reflects the potential for loss. However, many regulators worldwide, including in the US, have yet to mandate it for all lenders, worrying that there could be greater risk due to their inability to properly deal with its complicated accounting demands".