China yesterday urged banks to be more alert to risks from their breakneck lending and also warned them to brace for a policy shift, the latest signal that it might gradually unwind loose monetary conditions.

Chinese banks must be "reasonable" in their lending and guard against a rise in their bad loans, the country's top banking regulator, Liu Mingkang, said in a sternly worded statement.

"You must quickly establish and perfect liquidity risk management systems and pay close attention to the possible impacts on market liquidity of international capital flows, macroeconomic trends and policy adjustment," Liu said.

His comments followed a speech by central bank Governor Zhou Xiaochuan last week in which he said that China's easy monetary stance had been a necessary response to the global financial crisis and could not continue indefinitely.

China will announce its third-quarter gross domestic product today, and economists polled by Reuters expect it to have grown 8.9 percent from a year earlier.

Even as China has led the world in bouncing back from the financial crisis, officials have been circumspect about the solidity of the recovery and insisted they would not abandon the loose monetary policy and fiscal stimulus adopted a year ago.

China's banks, almost all of which are state owned, have been at the front line of economic revival efforts, issuing 8.67 trillion yuan (US$1.27 trillion) in new loans in the first nine months of the year, 75 percent more than in all of 2008.

"Risks have been mounting as credit has surged. We need to pay close attention to that and effectively address the risks," Liu said in the statement posted on the China Banking Regulatory Commission's Website.

Much of the credit has gone into government-backed infrastructure investment, and some analysts have expressed concerns about how the money will be repaid.

Liu reiterated that banks must set aside more money by the end of this year in case their assets sour. The CBRC has told banks to increase their loan loss provisions to at least 150 percent of their non-performing loans.

Banks' non-performing loan ratio had fallen to 1.66 percent of total loans at the end of September from 2.42 percent at the end of 2008, Liu said.

The lending explosion this year has, if anything, flattered the ratio by increasing the amount of new assets on banks' books. Any fall-out will only show up over the coming years as the mountain of loans comes due.

Another senior banking regulator said yesterday that the loans need not lead to a rise in bad debts, as long as banks manage their assets well.

"At an early stage of repayment, some cash flow problems could emerge," said Li Fu'an, director of the CBRC's business innovation and supervision department.

But he said that banks could manage their portfolios by securitizing assets and rolling over loans, among other means.

"If banks use these tools, the loans will not turn into bad assets on their balance sheets," he said.

Looming over Chinese banks is the question of how they will pace their lending next year.