Chinese banks' loan growth is expected to slow to 10-15 percent next year because of banks' stretched balance sheets and possibly tighter credit policy after a credit boom in the first half of this year, Moody's said yesterday.

At the end of last month, outstanding value of total loans rose 33.3 percent year on year to 40.75 trillion yuan (US$5.97 trillion) in China. In the first eight months, yuan-backed lending increased 8.15 trillion yuan, already surpassing the original 5 trillion yuan target for the whole year.

"Chinese banks' loan growth isn't sustainable," Leo Wah, Moody's Investors Service's senior analyst, said in a report yesterday. "While the recent loose monetary policy has not been tightened officially, signals have been given to slow loan growth."

Premier Wen Jiabao said last week that China will continue its relatively loose monetary policy because China's economy is still unstable.

Market analysts are sensing tightening signals on regulators' stricter requirement on capital and more issuance of central bank bills, paving the way for a slowing of credit growth in the second half of this year.

"Banks' balance sheets have already been stretched, with capital adequacy ratios and loan-to-deposit ratios approaching the regulatory threshold," Wah said.

The China Banking Regulatory Commission recently solicited opinions from banks on driving out the cross-holding of subordinated bonds as banks' capital base, putting a stricter requirement on lenders' capital.

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.

Listed banks such as Shanghai Pudong Development Bank have announced shares sales to boost their capital ratios.

(Shanghai Daily September 15, 2009)