China’s commercial banks have been urged to accelerate loan support to private sector when tightening lending policies to cool down expansive investment and credit growth.

Liu Mingkang, chairman of China Banking Regulatory Commission (CBRC), called upon financial institutions to step up support - especially to the nation's privately-owned companies - during a tour late last week to East China's Zhejiang Province, where the private sector is the most developed.

"For various reasons, the private sector has experienced new situations and difficulties while benefiting from the ongoing round of macro management," he said on Sunday.

Liu acknowledged some banks have taken a simplistic "one-knife-cuts-all" approach when tightening loans as required by the State's recent macroeconomic measures, urging banks to try to meet businesses' normal funding needs and improving their services.

He said legitimate funding needs, even from companies in the overheated sectors such as steel and cement, should be met.

Frenzied fixed investment and bank loan growth in some sectors starting in the second half of last year has prompted the government to take a string of tightening measures, including requiring banks to set aside more reserves to restrict their lending capacities and tightening land controls.

The growth in fixed investment and bank lending slowed down significantly in April and May, boosting confidence that the State's measures are working and reducing the possibility of further tightening measures that some fear would lead to an abrupt economic slowdown.

But many small and medium-sized enterprises (SMEs), mostly privately-owned, have been experiencing liquidity difficulties recently as some banks have become excessively strict with their lending operations.

New bank loans in the first half of this year were 350 billion yuan (US$42 billion) less than a year earlier, mainly because of decreases in short-term working capital loans and those through commercial bills.

"The number (of companies suffering liquidity difficulties due to strict bank lending) is presumably not a small one," said Qin Chijiang, deputy secretary-general of the China Society of Finance.

The victims are mostly SMEs and more profitable companies, said Qin, who surveyed companies in North China's Shanxi Province last month.

Liquidity pressures have also pushed many SMEs to unregulated private lending markets, which has drawn attention from the financial authorities.

In Wenzhou of Zhejiang Province, lendings among individuals and companies are estimated to have grown to 35 billion yuan (US$4.2 billion) in recent months, as compared to an average of 20 billion (US$2.4 billion).

Low interest rates on bank deposits, with the one-year rate standing at a years-low of 1.98 per cent, have made underground lending far more attractive. The one-month lending rate in some underground markets has capped 1 per cent in recent months, earlier reports said.

As banks adjust their lending terms, the CBRC's Liu said, privately-owned companies need to improve their corporate governance mechanisms, control their debt burdens, enhance transparency and make better use of consulting services available when formulating strategic plans.

The regulator also urged the companies to concentrate on their core business and refrain from expanding into other regions prematurely or becoming involved in too many affiliated transactions.

(China Daily August 3, 2004)