Domestic banks are guided by market conditions and prudence - and not government diktat - when issuing new loans, the chairman of Bank of China has asserted.

No political leader has told his bank to lend as part of the central government's stimulus package to cope with the economic crisis, Xiao Gang told China Daily.

The situation is the same with other commercial banks and has been so for many years, he said.

Chinese banks are expected to grant some 5 trillion yuan (US$732 billion) in new loans this year, Premier Wen Jiabao told the annual session of the top legislature in Beijing last week.

Last year, new yuan loans amounted to 4.9 trillion yuan.

But banks are increasing their lending portfolio not because they are told to do so by the government, but because government-approved development projects are potentially the most lucrative, Xiao said.

Contrary to speculation that political pressure is behind the dramatic rise in drastic lending growth (1.62 trillion yuan of new loans in January alone, up 101 percent year on year), "the pressure is only from the market - in the form of competition from other banks and the expectations of ever-improving performance from our shareholders," said the boss of one of the four largest State-owned banking corporations in China.

Since the restructuring of the banking industry in 2003-04, many State-owned banks have become publicly-listed companies.

Right now, the lenders' game is to get a larger share of Beijing's 4-trillion yuan (US$586 billion) economic stimulus package because they have little to worry about its implementation process, Xiao said. Most of the new loans issued in recent months have gone to the infrastructure projects in the stimulus package, he added.

Low interest rates are also a factor driving the banks to compete for more profitable lending projects, Xiao said. The central bank slashed lending and deposit rates by 1.08 percentage points in November, the largest reduction in more than a decade.

So whenever a good project is identified, "we have to try to lend early and lend a lot," Xiao said,

Xiao admitted that such rapid lending growth could lead to an increase in non-performing loans. "There is a possibility. That's also why we always have to be careful."

But Chinese banks are better equipped to handle bad loans than they were five years ago, thanks to stricter banking regulations, he said.

Xiao also said BOC is working on overseas expansion although it will remain "very cautious" with mergers and acquisitions.

BOC has more than 800 branches or outlets in 29 countries and regions; and this year marks the 80th anniversary of its first overseas branch in London.

Overseas, "BOC will concentrate on supporting Chinese companies' expansion," Xiao said. But since it takes a long time to set up branches abroad, BOC will seek to tie up with foreign financial institutions in those countries.

According to the company's statement, BOC has provided US$26.9 billion in loans and services to more than 80 Chinese companies, including Sinopec, China National Petroleum Corp and China Mobile, in more than 60 countries.

(China Daily March 17, 2009)