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The Shanghai Bureau of the China Banking Regulatory Commission has asked banks to "strictly control" lending to newly form local government-backed investment arms and to new projects of existing investment vehicles, the local banking watchdog said in a statement yesterday.

 

Lenders must fully scrutinize their existing loans, especially those given to low-level financing vehicles of the local government with an unsteady capital source and to stop loans to their uncapitalized projects, the local banking watchdog said.

 

"Banks must check such credit case by case to confirm the capital needed for the projects, land approval, collateral and the final use of the loans to make sure that each loan is extended for solid reasons," said Yan Qingmin, head of the local banking regulator.

 

By the end of April, half of the loans have been scrutinized to ensure there were no irregularities, the statement said.

 

Banks should demand that loans granted to overcapacity industries or were misused or left idle be returned as soon as possible, according to the regulator.

 

The increased checking is part of China's move to monitor loans granted to financing arms of local governments. The governments sidestep restrictions on them to raise capital directly through these arms, which play a big role in boosting local economic growth.

 

However, the rapid increase in such lending may bring about possible risks because banks may ease their stringent checks when they granted loans to the government-backed enterprises.