China's banking regulator again urged banks to faithfully implement the State's recent tightening policies, stressing the importance of healthy macroeconomic fundamentals to sound bank performance during an announcement Tuesday.

"Once macroeconomic stability is lost, and major fluctuations ensue, it will... deliver a heavy blow to the banking sector - the artery of a modern market economy," the China Banking Regulatory Commission (CBRC) said in an article published on its website Tuesday.

The article was credited to Zhang Yuan and Li Fu'an, who together head the commission's Rules and Regulations Department.

The potential damage caused by macroeconomic imbalances on the banking sector are "especially direct and strong" in an economy like China, which is overwhelmingly funded by bank loans instead of the capital market, they said, citing the example of a 10-year period of stagnation in Japan.

The CBRC warning came after its recent announcements that it will inspect bank loans for fixed asset projects in sectors diagnosed with signs of excessive investment, and followed earlier remarks by senior regulators urging banks to "study" the State's macroeconomic policies.

One source said the CBRC will hold a teleconference tomorrow to further map out its plans to implement the central government's macroeconomic policies, which largely aim to manage a "soft landing" for the expanding economy by slowing down investment in certain industries as well as bank loans.

"They (the CBRC) are keeping pace with the central government by trying to prevent local governments, banks and businesses from merely paying lip service," said Wang Yuanhong, a senior analyst with the State Information Center.

Despite some tightening measures in the latter half of last year, China's fixed investment continued 2003's sizzling growth to surge by 42.8 percent in the first four months of this year, prompting the government to stage further policy initiatives during the past two months, including some controversial administrative measures.

Fixed investment expansion was also seen to have been fuelled by rapid credit growth, which had also led to worries about new bad loans being accumulated.

Some domestic banks, especially the smaller joint-stock commercial banks, are believed by analysts to not have strictly followed the government's recent tightening policies as they eagerly pursued profits and a bigger market share.

And there are widespread worries among companies in the "overheated" industries - steel, cement and aluminium and some others - that they may lose out on good opportunities to make huge profits if they do what the government says.

Some small firms in sectors like steel and coal, which survived a consolidation a few years ago when others were shut down for fear of overcapacity, made significant fortunes from the ongoing price surges.

"The tightening is surely correct, but it may not be in the best interests of all banks and enterprises," Wang said.

Since the latter half of last year, the government has taken a slew of measures to cool down rapid fixed investment and loan growth, and slow down accelerating prices, including three increases in the reserve requirements of banks, aimed at restricting their lending capacities.

New loan growth has been on a downward turn for the past seven months, but the pace remains at a high level. A total of 1.03 trillion yuan (US$12 billion) of loans were granted in the first four months of this year alone, which accounted for nearly 40 percent of a 2.6 trillion yuan (US$313 billion) full-year loan growth target.

In the article yesterday, the CBRC also urged banks to not take a simplistic approach to implementing state policies, encouraging them to step up funding support for companies with promising market prospects while restricting loans to those banned by the State.

The article also elaborated on the need to foster a sound credit culture at commercial banks, as well as the commission's efforts to establish a new banking supervision mechanism "under new circumstances.

(China Daily June 2, 2004)