China’s regulator warns on loan spree

China’s top banking regulator on Friday warned of growing risks to the country’s financial system as a result of an unprecedented expansion in new loans and urged the country’s lenders to improve their internal management.

The statement by Liu Mingkang, chairman of the China Banking Regulatory Commission, may signal a more assertive stance from the body in the build-up to a top-level Communist party meeting scheduled for November that will set the country’s economic agenda for the coming year.

Chinese financial institutions extended Rmb8,185bn ($1,199bn) in local currency loans in the first eight months of this year, an increase of 164 per cent from the same period in 2008, a credit binge analysts say has been facilitated by a serious relaxation in lending standards.

“This year, all kinds of risks have arisen in the banking sector along with the rapid credit expansion,” said Mr Liu in a written statement. “Banking institutions should always stick to the bottom line of compliance management, to lay a solid foundation for risk management.”

For most of this year, the CBRC has been an almost lone voice within the government urging caution over the rapid loan growth and the potential for a future shock to the system.

China’s economic recovery has been largely fuelled by the flood of credit from the state-controlled banks but this has prompted fears of fresh bubbles forming in the property and equities markets and raised the prospect that growth could falter as lending returns to a more sustainable level.

“This is a high-risk strategy, since in prior eras, massive Chinese loan growth eventually led to massive Chinese non-performing loans and a banking sector that had to be recapitalised,” Michael Cembalest, chief investment officer at JPMorgan Global Wealth Management, said in a recent report.

“The removal of loan quota limits once the global recession hit may have unleashed a torrent of relaxed underwriting standards that will not be visible until the next downturn.”

The CBRC has introduced tightening measures in recent months, demanding that banks increase the money they hold in reserve to cover bad loans and monitor whether their loans are being diverted into speculative investments in stocks and property.

Chinese banks are required to maintain a minimum capital adequacy ratio of 8 per cent, but the CBRC has ordered most banks to raise their reserve funds to 10 per cent.