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October 29, 2009

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China eyes new rules to regulate bank loans

CHINA yesterday issued draft rules to tighten oversight of personal loans as it steps up efforts to prevent credit from being channeled into the stock and property markets.

It was the third time in less than four months that the country has vowed to curb misuse of bank loans. Previously, China's banking regulator tightened supervision of credit for fixed-asset investment and corporate working capital.

In the draft rules posted on its Website, the China Banking Regulatory Commission said lenders must transfer the proceeds of loans exceeding 300,000 yuan (US$44,000) directly to the ultimate recipient rather than giving them to the borrower.

Banks would not be able to issue personal credit if the borrower does not specify the intended use of the proceeds. They also have to meet individuals in person before granting them loans rather than dealing with an agent or other third party, according to the draft.

Pump priming

"The rules are aimed at boosting support for domestic consumption and ensuring that credit capital is entering the real economy," the CBRC said. The regulator said it will accept public comments on the regulation until November 19, but it didn't say when the new rules might go into effect.

China's new yuan-denominated loans totaled 8.67 trillion yuan (US$1.27 trillion) in the first three quarters, up 149 percent from the same period of last year, as the country loosened its grip on credit to support economic recovery.

Thanks to a strong fiscal stimulus package and loose monetary policy, the country's economy grew 8.9 percent in the third quarter, compared with rises of 7.9 percent in the second quarter and 6.1 percent in the first.

The economic rebound has sparked concern, however, that a large chunk of lending may have been illegally channeled into the securities and real estate markets, raising the risks of asset bubbles.

Right timing

"The economic recovery offers more leeway to regulators to tighten oversight of loans," said Li Weiyi, a Bank of Communications analyst. "They are now seriously considering how to curb potential overheating in the stock and property sectors."

Despite significant volatility, the benchmark Shanghai Composite Index has surged 66 percent so far this year. The country's average home prices grew 2.8 percent year on year in September, the fastest pace in a year, after gaining 2 percent in August.

"The news (of the possible rule change) could have a negative psychological impact on some investors in the stock and property markets," said Wei Ming, a Guosen Securities Co trader. "But its real influence will largely hinge on how it is implemented by the commercial banks."


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