China tells banks to limit loan to local governments

China's banking regulator has told commercial lenders to restrict new lending they provide to local governments' financing arms to ward off potential risks of default, state media reported yesterday.

While relatively limited in scope, the step marks a continuation of efforts to check explosive lending growth that has set off concerns about asset price bubbles and the potential creation of a fresh crop of bad loans. The China Banking Regulatory Commission (CBRC) ordered banks to inspect their existing loans to firms used by local governments to raise funds, and to stop lending to those projects that are backed only by expected fiscal revenues, the official Shanghai Securities News newspaper said, citing unnamed sources.

The CBRC this year has also ordered banks to check their loans are not flowing into property or stock market speculation, while the central bank has twice raised banks' required reserves and ordered some lenders to put up additional punitive reserves.

The newspaper also reported the CBRC had ordered trust companies to ensure they were not supplying credit to developers to build up reserves of land.

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