BEIJING: China Construction Bank Corp (CCB) President Zhang Jianguo said the nation's second-largest bank will cut new lending by about 70 percent in the second half to avert a surge in bad debt.

"We noticed that some loans didn't go into the real economy," Zhang, 54, said in an interview Friday at the bank's headquarters in Beijing. "I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast."

CCB plans to extend about 200 billion yuan ($29 billion) of new loans in the second half, down from 708.5 billion yuan in the preceding six months, Zhang said. The company advanced 238 billion yuan in the year-earlier period.

Zhang's comments add to evidence that mainland banks may curtail credit after they advanced a record $1.1 trillion of new loans in the first half, almost equivalent to India's gross domestic product last year. The benchmark Shanghai Composite Index has rallied 84 percent in 2009 and real estate and land prices have rebounded, fueling concern that loans meant for infrastructure projects are being used for speculation.

The benchmark index dropped for a third day, losing 1.3 percent, as developers including Poly Real Estate Group Co and China Vanke Co tumbled on news that CCB would curb new lending. CCB shares slipped 3.2 percent to HK$5.75 at the end of trading in Hong Kong Friday.

The People's Bank of China (PBoC) said on Wednesday it will use "dynamic fine-tuning" and guide "appropriate" loan growth. The statement suggests the central bank will tighten monetary policy, said Galaxy Securities Co chief economist Zuo Xiaolei. Construction Bank said last month it will follow government monetary policy.

CCB's market value of $176 billion places it third among banks in the world by that measure, behind Industrial & Commercial Bank of China Ltd (ICBC) and HSBC Holdings Plc.

The central government spent about $650 billion cleaning up its banking system over the past decade after years of state-directed lending caused a pile-up of bad debts. Excess capacity in some industries and a property bubble has led to increased risks for banks, said Zhang.

"Our experience is that, a period of time after rapid economic growth and rapid bank lending growth, problems will gradually emerge," he said. "The risk is evident."

While slowing loans at home, Zhang said he plans to expand abroad to close a gap with ICBC and Bank of China Ltd. Shares of CCB have gained 36 percent in Hong Kong this year.

CCB is in advanced talks about an acquisition in Asia outside the mainland, Zhang said. The deal has won regulatory approval and may close in the next two to three months, he said. Zhang declined to identify the target or give the size of the deal.

China Daily - Bloomberg News

(HK Edition 08/08/2009 page5)