The guideline jointly issued by the People's Bank of China and the China Banking Regulatory Commission on improving the structure of loans indicates regulators are not taking it for granted that domestic banks will take on appropriate levels of risks amid the ongoing credit boom.

While encouraging credit expansion to support the country's stimulus package, banking regulators should step up efforts to ensure that the surge of credit will not only speed economic recovery but also sustain future growth.

In the first two months of the year, Chinese banks issued a total of 2.67 trillion yuan in new loans, more than half of what they granted in the whole of last year.

Such a jump in new loans shows that the country is pulling out all stops to boost the economy.

In fighting the worst global financial and economic crisis in many decades, most countries have agreed that a loose monetary policy is a must.

China has decided to combat the current downturn with the combination of a moderately eased monetary policy and a proactive fiscal policy.

The sound performance of Chinese banks last year has given regulators room to maneuver to shore up credit support for the Chinese economy.

When many foreign banking giants were suffering from their biggest losses, Chinese banks managed to cut non-performing loans by 700 billion yuan (US$102 billion) to 568 billion yuan (US$83 billion), bringing the non-performing loan ratio down by 3.71 percentage points to 2.45 percent by the end of 2008.

Even better, the sector's profit increased 30 percent year on year to 583.4 billion (US$85 billion).

Yet, the real test for them comes as the global financial crisis worsens and domestic economic growth slows this year.

As domestic banks respond to the government's call to extend loans at unprecedented speed and scale, regulators should also upgrade their supervision on the sector's risk controls.

The new guideline is much needed to prevent domestic banks from lending irresponsibly for credit growth. For instance, no bank should be allowed to extend loans to polluting industries.

Equally important, the new guideline also urges domestic banks to live up to their role in supporting small and medium-sized enterprises. While most banks favor State-led infrastructure projects or large State-owned companies, few Chinese banks have really made themselves a friend for small business.

Those big projects and companies are crucial to the Chinese economy, but the success of numerous small businesses is of no less importance for the country's long-term growth.

It is hoped that the banking regulators will do their most to make the credit boom also a boon for small and medium-sized enterprises.

(China Daily March 26, 2009)