Chinese banking regulators reiterated yesterday that banks should carefully control credit risks while extending loans to support economic growth.

Credit concentration in certain industries, regions or businesses could make banks more vulnerable to macroeconomic swings and corporate operational cycles, Wang Huaqing, disciplinary secretary of the China Banking Regulatory Commission (CBRC) said in a statement.

"Such concentration may possibly incur systematic risks in the banking sector," he said.

Chinese banks lent a record 5.84 trillion yuan (US$854.39 billion) in new loans as of May, many of which has been poured into infrastructure projects. Some industry insiders said bank lending in June could exceed 1 trillion yuan, as mid-sized lenders began to flex their muscles toward the end of the first half.

Though there are concerns that China's explosive lending could sow the seeds for massive future bad loans, the country's banking watchdog feels that it was obligatory for the banking sector to support the nation's economic recovery.

An official with the CBRC, who asked not to be named, said earlier that a mild increase in bad loans in the next few years was tolerable, as bank loans is so important for the economic recovery in such an extraordinary time.

"As far as we know, banks are still very prudent in extending loans. Many banks increased the amount of loans extended to their credit-worthy clients, rather than increasing loans to high-risk clients," the official said.

However, analysts said the explosive lending could become the backbone to shore up domestic banks' financial results this year, as most listed Chinese banks have outperformed their full year lending targets even though there is still nearly half a year ahead.

In the first five months, the "Big Four" State-controlled banks, major forces initiating the country's lending spree, have given out a total of 2.87 trillion in new yuan loans, all of which has topped their individual yearly target set at the beginning of the year, analysts said.

Shenyin & Wanguo Securities, a major brokerage in China, predicted new yuan loans could reach 800 billion yuan in June and then decline significantly in the second half, but said interest income from the massive lending in the first half and better-than-expected asset quality would bolster banks' financial results this year.

"If the country's economic recovery is sustainable, it could also be a key positive force to support banks' revenue growth, profitability as well as asset quality," it said in a research note.

Huang Qiuhan, banking analyst with First Capital Securities, said if the economy could realize a V-shape recovery in the second half, even if banks' loan quality deteriorates, it will be a slow and gradual process, which will not be a heavy blow to banks' financial performance.

"Another boon to banks is net interest margin may have bottomed out in the second quarter, as mid and long term loans continued to gain in the ongoing credit expansion, while on the debt front, the share of fixed deposits is declining," Huang said.

(China Daily July 8, 2009)