Banks should welcome the Chinese government's stricter stance on their capital base because it will benefit them although it will also affect their lending capacity, said a vice chairman of the regulatory body over the weekend.

The China Banking Regulatory Commission is soliciting opinions from commercial institutions, including the big state-owned lenders and joint stock banks, on the draft of a new calculation method on their capital base, Jiang Dingzhi, vice chairman of the CBRC, said at the China Bankers Forum 2009 in Shanghai on Saturday.

The regulator will fine tune the draft after analyzing the feedback, he said.

"Supervision on capital is core to our work," said Jiang. "The rule, which aims to improve the quality of banks' capital, will affect lending activity, but banks will reap fundamental benefits all the same."

A subordinated bond is one means for banks to expand capital. It has been a popular practice for Chinese banks to inflate their capital base by counting holdings of each other's subordinated debt as part of their capital base.

How much a bank can expand in credit is limited by its capital base, so more capital means more room for expansion.

The CBRC said last Thursday that it will take several years to phase out the holdings by banks of each other's subordinated bonds.

Chinese banks sold 236.7 billion yuan (US$34.66 billion) worth of subordinated bonds this year, almost tripling the amount issued last year, according to Bloomberg News.

Meanwhile, Su Ning, deputy governor of the People's Bank of China, the central bank, said at the forum that the country will use various policy instruments to adjust the growth in loans.

"We are studying the use of a variety of policy tools to adjust banks' lending activity," Su said, without elaborating.

Banks in China have lent 7.73 trillion yuan of loans in the first seven months of this year, a jump of 173 percent from a year ago. The new loans have already beaten the 5 trillion yuan target for 2009 that was set at the start of this year, causing worries over possible asset bubbles.

(Shanghai Daily September 7, 2009)