BizNomic

As a follow up to the recent increase in the reserve requirement ratio in China, the CBRC (China Banking Regulatory Commission today announced two more regulations aimed at monitoring working capital loans and personal loans.

The regulation on working capital loans stipulates, working capital loans cannot be used in investments including fixed assets and shareholding. The issuance of excessive loans and appropriation of loans should be also be avoided. Face to face interviews will be made necessary when approving personal loans, according to the regulation on personal loans. The two regulations both state lenders and borrowers should declare the purpose of loans before they are made. The regulator will punish lenders that freely distribute working capital loans and companies that use those loans for purposes such as capital expenditure, stake investment and some other areas that the government doesn’t allow, CBRC said.

China tightens leash on banks

Besides, The regulator also confirmed draft rules that personal loans of more than 300,000 Yuan may not be disbursed to the individual borrowing the money but must be transferred to the intended end-recipient, such as a house seller. The method will serve as supervisors’ key instrument in controlling the use of credit loans. The wording of the directives reflects fears that some loan proceeds were improperly diverted into the property and stock markets last year.

It is anticipated that the lending is essentially stimulus driven and thus, might be brewing a dangerous bubble in the stock and real estate markets. Banks extended 19 per cent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January and property prices rose the most in 21 months. China tightened rules on loans for homes, automobiles, fixed-asset investments and working capital to limit speculative flows.

“Credit growth this year will continue to concentrate on medium- to long-term loans”, said Sun Peng, a banking sector analyst with BOCI, a subsidiary of Bank of China (BOC), adding that though banks’ operation costs will be raised and their profitability will be affected after the implementation of the regulations, their credit risks will be lowered afterward.

China has raised the deposit reserve requirement ratio (RRR) twice this year, after holding it steady for over a year, to handle the “comparatively loose liquidity” while keeping the “moderately easy” monetary policy unchanged, according to the central bank. It had notched up the ratio to 16.5%.

The two newly released regulations are the Interim Measures for the Administration of Working Capital Loans and the Interim Measures for the Administration of Personal Loans. Prior to this, the CBRC released the Guidance on the Project Financing Business and the Interim Measures for the Administration of Fixed Asset Loans in July 2009. The “three measures and one guidance” are now called new loan regulations and is the nation’s earnest attempt at controlling subprime credit.

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