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Chinese banks to be punished for risky lending
November 24, 2009

New bank loans reached 7.4 trillion yuan ($1.1 trillion) in the first half of the year New bank loans reached 7.4 trillion yuan ($1.1 trillion) in the first half of the year
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China has issued a rare warning that it will impose curbs on banks unless they beef up their defences against bad loans as Beijing tries to put the brakes on a massive lending spree.

Banks that fail to comply will face "restrictions on market access, overseas investment, and outlets and business expansion," the China Banking Regulatory Commission (CBRC) said in a statement posted on its website late Monday.

The warning comes after the nation's banks lent a record amount of money this year following government calls to boost the economy in the face of the global financial meltdown.

China's banking laws have set the capital adequacy ratio -- the amount of capital banks must hold against their risk -- at a minimum of eight percent.

The prospect of the regulator baring its teeth as it tries to control credit sent the benchmark Shanghai Composite Index down by 3.5 percent at its close Tuesday, the biggest single-day fall in nearly three months.

It also had an impact on the Hong Kong bourse, which ended the day 1.53 percent lower.

Louis Kuijs, Beijing-based senior economist for the World Bank, said the move could have a chilling effect on lenders.

"The increasing attention by the regulators to the risks that the banking system faces and the increased awareness that the regulators are raising ... underscore the direction in which the policy makers want to move and are moving," he told AFP.

"If the regulator who oversees my industry starts to increasingly express its concerns and makes it clear that he wants to enforce existing measures as much as possible, I think that may affect my behaviour to some extent."

The statement stressed that lenders must also raise their loan-loss provisions to at least 150 percent of their bad loans by the end of the year.

Such provisions at China's commercial banks stood at 144.1 percent at the end of September, the latest official data showed.

The published list of possible punishments for wayward banks was an unusual move, highlighting Beijing's rising concern that brisk loan activity could result in asset bubbles and a slew of bad loans.

New bank loans reached 7.4 trillion yuan (1.1 trillion dollars) in the first half of the year, as banks heeded government calls to pump money into the world's third largest economy to fight off the global slump.

The pace slowed after regulators told banks to rein in lending and step up risk management, while seasonal factors also played a role, economists said.

New loans dropped to 253.0 billion yuan in October, the lowest monthly level since the beginning of the year, official data showed.

AFP