China tells banks to ensure loans enter real economy

July 27, 2009

BEIJING, July 27 (Reuters) – Chinese banks must ensure that loans they issue for investment projects are actually being put to use in the real economy, the country’s banking regulator said on Monday.

The warning came after Chinese banks pumped out a record 7.4 trillion yuan ($1.1 trillion) of loans in the first half of the year, almost 25 percent of GDP, fuelling official concerns that many were flowing into stock market and property speculation.

In announcing new rules to govern “fixed-asset investment loans”, the China Banking Regulatory Commission (CBRC) said many banks had not performed sufficient risk management and it vowed to strengthen supervision.

“Many financial institutions pursue business growth but are weak in risk management; highlight pre-lending examination but neglect after-loan supervision; or stop loan management at superficial levels,” the regulator said in a statement on its website (

It said banks must clearly stipulate in every loan agreement how credit will be used.

For any fixed-asset investment loan larger than 5 million yuan, banks should not give the entire amount to the borrower but rather give a portion to the end-recipient, CBRC said.

For example, a loan to a construction company for a building project could in part be channelled directly to the manufacturers of machines or materials that it plans to acquire.

Liu Mingkang, the head of the CBRC, warned last week of risk from surging bank lending, singling out the dangers of unhealthy growth in the property sector in particular.

The central bank last week also pledged to “focus money and credit growth on supporting sectors of the real economy” for the rest of the year.
(Reporting by Zhou Xin and Simon Rabinovitch; Editing by Neil Fullick)

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