HONG KONG: Bank of China Ltd, which doled out the most loans among mainland banks in the first half of the year, plans to keep expanding credit unless the government clamps down on the nation's record lending boom.

The nation's third-largest bank will maintain its original target of generating about 10 percent of the country's new loans in 2009, Beijing-based spokesman Wang Zhaowen said by telephone yesterday. Bank of China may "fine-tune" its strategy in line with any government policy changes, he said.

Bank of China advanced a record 902 billion yuan ($132 billion) of loans in the first half, leading a credit explosion that drove stocks and property prices higher and helped spur an economic recovery. The lending spree, encouraged by the government, has fanned concerns that asset bubbles will form and bad loans will increase. In a related development on Monday, the bank regulator called on lenders to control the flow of credit.

"Banks are willing to sacrifice their long-term health for short-term gains in profit, and more importantly, to please the government," said Wen Chunling, a Beijing-based analyst at Fitch Ratings. "A significant part of the loans extended in the first half may become non-performing over the next five to 10 years."

Capital adequacy ratios at mainland Chinese banks have dropped as a result of a surge in lending in the first half of the year, the central bank said in a report on its Web site yesterday.

"The rapid decline in capital adequacy ratios and strengthened risk management may constrain the banking industry's ability to sustain rapid growth in credit," it said.

The China Banking Regulatory Commission has indicated in past weeks it's concerned about excessive credit creation.

Yesterday, the watchdog told banks to ensure that loans intended for investment in fixed assets go to projects that support the real economy.

That push is colliding with the government's attempts to ensure an economic recovery.

"Banks have every incentive to dole out more loans," said Yang Qingli, a Beijing-based analyst at BoCOM International Ltd.

"When the government is driving in the fast lane, you can't just stop immediately."

"New loans on the mainland may surge to a record 11 trillion yuan this year as the government is still concerned about a possible second dip in the recovery path," BNP Paribas SA said last week.

Bloomberg News

(HK Edition 07/29/2009 page4)