China's banking regulator urged banks to strengthen risk control and optimize credit structure to prevent possible financial risks amid a surge of bank loans.

Rapid expansion of bank loans in the first half year boosted the country's economic growth, but it also increased the possibilities of financial risks, Liu Mingkang, chairman of the China Banking Regulatory Commission, said in a speech posted on the regulator's web site on Sunday.

He said Chinese banks had seen imprudent and extensive lending, and should be cautious about possible risks including inadequate capital for investment projects, financing risks, concentration of loans, and risks on property market led by rapid loan growth.

He urged lenders to ensure the minimum requirement of capital adequacy ratio and lift the provision coverage ratio above 150 percent this year. As of the end of June, the provision coverage ratio of commercial banks was 134.3 perent, which was 10.4 percentage points higher than the end of March.

He also encouraged banks to continue lending to major projects backed by the government, small-and medium-sized enterprises, rural development, low-income housing, major scientific research, energy conservation and emission cuts programs.

Loans to energy intensive and heavy pollution industries, and to sectors of overcapacity should be under strict control, he noted.

In addition, he ordered lenders to stick to rules on mortgage for second home buyers and step up scrutiny over approvals. Down payments on second homes is currently set at no less than 40 percent of the price.

Government data showed bank lending hit a record 7.37 trillion yuan (US$1.08 trillion) in the first half, as the government looked to a moderately easy monetary policy to support economic recovery. The figure far exceeded the full-year target of 5 trillion yuan.

The banking regulator said in early July that current rapid loan growth posed a risk to the country's lenders and a concentration of loans to some industries and business may damage the stability of the financial system. The watchdog suggested syndicated loans as a good tool for banks to share risks.

The central government reiterated the stance of adherence to the current stimulus policies. Chinese Premier Wen Jiabao said on July 10 that the government should steadfastly adhere to the pro-active fiscal policy and relative easy monetary policy.

Wang Qing, Morgan Stanley's chief China economist, said the loan growth should normalize in the remainder of the year, as the pace in the first half of this year is not sustainable.

China should stick to the current pro-active fiscal policy and moderately ease monetary policy in the following months to fuel the economic growth, he said, adding shift to tightening policy might slow down the current growth.

Wang said it's not a problem for Chinese economy to achieve its goal of eight percent growth for this year.

The Chinese economy expanded 7.9 percent in the second quarter, buoyed by the government's massive stimulus packages. The first half year recorded a growth of 7.1 percent year on year.

Liu said China's economy was back on the track for recovery as a result of a pro-active fiscal policy and moderately easy monetary policy, but the foundation for recovery was not yet solid and there are still many uncertainties.

Liu Mingkang was speaking at a conference held in Beijing on July 17.

(Xinhua News Agency July 20, 2009)