China's banking regulator is reportedly ordering banks to restrict lending to financing units of local governments as the latest move to tighten credit on worries of rising loan defaults.

The China Banking Regulatory Commission told banks to inspect their existing loans to financing companies used by local governments to raise funds and to halt lending to projects that are uncapitalized and backed only by expected fiscal revenues, the Shanghai Securities News reported yesterday, citing sources it didn't name.

Banks can continue lending to qualified "good" projects, the report said. Banks must strictly examine existing projects to see consolidated capital and collateral to ensure that their lending is secured.

Efforts to contact the CBRC for comment were not successful.

Banks in China extended a record 9.59 trillion yuan (US$1.4 trillion) of new loans in 2009 - almost double the 5 trillion yuan target - to shore up economic growth to deflect the impact of the global financial crisis. The easy flow of credit helped China's economy to grow 8.7 percent last year. However, the flood of credit also translated into high-flying asset prices which increased inflationary pressure.

Liu Mingkang, CBRC chairman, said he expected the nation's banks to extend credit totaling 7.5 trillion yuan this year.

"China's stimulus measures were more akin to a blunderbuss than a sniper's bullet; everything that could be done, was done," Stephen Green, a Standard Chartered economist in Shanghai, said in a note.

He referred to the massive new wave of infrastructure projects that were approved (only partially funded through the budget), a tsunami of bank credit that was allowed to flood into the economy, the stimulus of loans and tax cuts for the property sector, and the Ministry of Finance boosting spending, he said.

"Now we see policy moving towards moderation on all these fronts," he said.

The People's Bank of China has increased the issuing rates of central bank bills to mop up liquidity and raised the reserve requirement ratios twice in a month this year to freeze more money that would otherwise be used for lending.