Compared with banks in the US and Europe, it's more important for Chinese commercial lenders to adhere to the Basel III Accords, which are designed to get banks to strengthen their capital adequacy ratios and guarantee the stability of the banking sector.

China's rapid pace of urbanization combined with the immaturity of direct financing vehicles mean that commercial lenders in the country are increasingly burdened by loans for government-backed construction projects. Making matters worse, domestic banks in China generally rate these loans as being relatively free of risk - a poor assessment considering that many local governments actually have very weak repayment abilities.

All in all, China's financial system is sitting on a potential time bomb, yet few local banks seem to realize it. If the country's lenders can't minimize their exposure to bad loans on their own, than the Basel III standards will provide more clear guidelines on how to do so.

Based on a speech made by Wu Xiaoling, former deputy governor of the People's Bank of China, at the China Financial Policy Symposium held by CEIBS Lujiazui Institute of  International Finance.