China's banking regulator is easing requirements on banks to report lower profits, delivering a reprieve for the US$45 trillion (HK$350 trillion) sector that has been under pressure to sacrifice earnings to support the economy.

The China Banking and Insurance Regulatory Commission has given major lenders discretion to report earnings declines of about 10 percent or less below the more than 20 percent drop seen in the second quarter, according to a Bloomberg source.

The news came after a sudden rally in Hong Kong-listed bank shares on Monday. The Hong Kong stock exchange suspended trading yesterday as Typhoon Nangka slowly passed by, around 450km from city.

The relaxation of a June directive to rein in profits comes as lenders face ballooning bad debt and eroding capital levels.

The instructions will alleviate a major concern for investors in Chinese banks, whose shares have been trading at record low valuations after they were enlisted to ease the financial hardship of millions of people and businesses hurt by the coronavirus pandemic.

Profit at China's banks plunged at the fastest pace since at least 2009 in the second quarter as bad debt hit a record level and capital buffers eroded.

Meanwhile, China's central bank issued draft rules yesterday for setting up a fund of up to 1 billion yuan (HK$1.15 billion) to help manage the risks of third-party payment companies, such as Ant Group's Alipay and WeChat Pay operated by Tencent (0700).

The People's Bank of China requires payment firms to hand in provisions from January 2019 to secure clients' money, which comes along with a quarterly interest.

Now it plans to take from 9.5 percent to 12 percent of that interest into the fund, according to a statement by the PBOC.

The fund, with a cap of 1 billion yuan, will be used to resolve financial risks resulting from bankruptcies and insolvency of third-party payment firms to maintain financial and social stability, the PBOC said.

The bank is seeking public opinion of the draft rules until November 13.

The new instructions from the CBIRC will alleviate investor concerns. REUTERS

Banks get a break on lowering earnings