CBRC Acts on Excessive Lending

In the face of a huge jump in lending in the first half of 2009, the China Banking Regulatory Commission (CBRC) issued two circulars on Monday requiring that banks make sure that new loans are channeled into the real economy.

One circular relates to the management of loan issuance for fixed asset investment, it requires that borrowers clearly state the purpose of their loan application, in order to prevent the loans from being used for other purposes. The circular ordered banks to monitor and inspect the how money that had been lent was being spent at regular intervals.

The other circular concerned loan issuance on project financing. The circular clearly defines the scope of what kind of project can raise capital by lending off banks. This list of approved projects includes those that construct a, or a set of, large production facilities, essential infrastructure, real estate projects and others.

The two circulars come in the wake of a huge burst in bank lending which saw Chinese banks extend a record 7.37 trillion yuan of new loans in the first half of this year, nearly 5 trillion yuan higher than the amount lent during the same period last year and 2.37 trillion yuan above the government's full-year target.

According to the central bank, of the total additional loans issued in the first half year, some 50% flowed to investment projects backed by local governments.

The dramatic growth in new loans has fueled fears that asset and stock market bubbles are forming and that banks are likely to be saddled with an increasing number of bad loans.

Last week, Chinese Premier Wen Jiabao pledged that the government would stick to its proactive fiscal policy and moderately loose monetary policy in order to sustain growth and ensure employment.

Links and Sources
China Banking Regulatory Commission: 《固定资产贷款管理暂行办法》
China Banking Regulatory Commission: 《固定资产贷款管理暂行办法》
China Banking Regulatory Commission: 项目融资业务指引 
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