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August 6, 2009

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Banking regulator moves in to cut risk in financial derivatives

CHINA will tighten rules governing the derivatives operations of domestic banks after financial institutions suffered losses during the global downturn, the country's banking regulator said yesterday.

The move would discourage lenders from trading complicated overseas derivatives and help institutions avoid financial risks, the China Banking Regulatory Commission said.

The country's banks have been asked to explain the use of derivatives products to their clients in an "understandable and clear" way, so customers can fully realize potential risks. Banks should also make thorough assessments of derivatives so the financial tools can meet the demands of clients.

And banks should be responsible for providing institutions and companies with timely information about products and re-assess their value for customers, the regulator said.

Chinese companies and financial institutions suffered great losses during the global financial crisis last year, many of which resulted from derivatives trading.

In March, China's State-owned Assets Supervision and Administration Commission urged centrally administrated state-owned enterprises to strengthen control over derivatives transactions.

The CBRC said it will keep a close watch on lenders' activities and strictly monitor derivatives transactions.

Also yesterday, China's central bank reaffirmed it will maintain its "moderately easy monetary policy" to consolidate the country's economic recovery.

The bank also said it would use market tools to guide appropriate lending growth during the second half of this year.

The major task ahead is to continue fostering steady economic growth by maintaining credit policy continuity and stability as the economy is in a crucial phase, the People's Bank of China said in its second-quarter monetary policy report. China's economy expanded 7.9 percent in the quarter from a year earlier, up from 6.1 percent in the first three months, boosted by government fiscal and monetary policies.

Chinese banks advanced a record 7.37 trillion yuan (US$1.08 trillion) in new loans during the first half of the year, exceeding the full-year target of 5 trillion yuan.

The PBOC said new loans to home buyers in the first half rose by 263.3 billion yuan year on year to 479.3 billion yuan, boosted by an upbeat property market performance.

Home sales began to increase after the Spring Festival, and prices have edged upward in recent months in most of China's large and medium-sized cities.

New credit growth for property developers increased by 221 billion yuan to 403.9 billion yuan.

"Although there are signs of stabilization in the United States, Europe and Japan, the ups and downs of those economies will not end in the short term," the PBOC said.

China's exports growth is also expected to slow.

Government figures show Chinese exports plummeted 21.8 percent year on year to US$521.5 billion in the January-June period, the sharpest decrease in a decade after global demand for China's goods slowed.


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