China to tighten bank capital rules: report

After a recording lending of $1.2 trillion in the first half of the year, China is planning to tighten capital requirements for banks on fears that the high lending may lead to a rise in bad loans.

According to a Bloomberg report today, Chinese banks may be asked to hold a greater portion of their assets in cash reserves to meet tighter new standards, the China Banking Regulatory Commission said in a draft set of rules sent to all banks today seeking their feedback.

Chinese banks have extended 7.4-trillion yuan ($1.2-trillion) of new loans in the first half of this year, which is nearly equal to 25 per cent of entire China's economy.

The banking watchdog asked banks to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital.

To meet the 12 per cent capital requirement mandated by the regulator, banks will need to put a curb on lending or sell off shares to meet capital requirement ratio.

The tough measure reveals the Chinese government resolve on more oversight on bank lending although it still follows its last year's loose monetary policy initiated following the global economic crisis that curbed the country's growth. (See: China to continue pursuing loose monetary policy to spur recovery)

Until last month, China's banks  sold $34.6 billion of subordinated bonds, which is nearly three times the amount extended during all of 2008.