The stringent rules, which have already begun sapping loan trading activity according to bankers, are part of Beijing's efforts to rein in excessive credit growth to cool a fast-expanding economy and two-year-high inflation.
But they will also likely arrest the development of China's newly created secondary loan platform, launched by the central bank in late September to help banks boost capital, reduce risks and facilitate interest rate reform. The new marketplace was partly created to increase the transparency of loan trading in China, where similar transactions had previously been conducted on an opaque, over-the-counter basis.
In an internal directive dated Dec. 3, the China Banking Regulatory Commission required counterparties of any loan transfer to sign new contracts that specify liability and that the transfer must cover the loan's full principal and interest income, said the person, who declined to be named. Partial loan transfers aren't allowed, he added.
The rules also stipulate that contracts for loan transfers can't include buyback options, he said.
In addition, buyers of loans must reflect the new liability in their balance sheets and sellers have to remove them, the person said.
"The CBRC's move is an additional measure which will further contribute to the authorities' efforts to slow lending growth in the country," said She Minhua, an analyst with Zhong De Securities.
Chinese banks tend to seek loan transfers near the end of each quarter to dress up their balance sheets and satisfy regulatory requirements on capital and risk controls.
Amid mounting concerns over the health of China's banking system, the CBRC has in recent months asked commercial banks nationwide -- especially major state-run lenders -- to beef up their capital bases and set aside more provisions for potential bad assets.
In a report last week, Fitch Ratings estimated that China's banks have already surpassed the CNY7.5 trillion ($1.126 trillion) limit regulators set on new local currency lending for this year, and also extended more than CNY3 trillion in credit that hasn't been recorded on their balance sheets.
Fitch said that in total lending, that is largely unchanged from 2009, when China's banks led a massive expansion of credit "roughly doubling the volume of new loans from a year earlier" as part of a stimulus program to keep the economy humming during the global financial crisis.
"The tougher loan transfer guidelines form lots of extra obstacles for participants in China's nascent secondary loan market," said a Beijing-based banker who declined to be named.
"The trading volume on the new market has already started to drop sharply as a result of the new rules," the banker said.
Besides the impact on the banking industry, the CBRC's new rules on loan transfers are also part of Beijing's broader strategy of exiting an essentially ultra-loose monetary policy.
China's consumer price index is estimated to have risen 4.7% from the same month last year, according to the median forecast in a survey of 15 economists, up from October's 4.4% rise.
The Chinese government has signalled its intent to keep inflation under control. Last week, the Politburo of the Chinese Communist Party ratified a transition to a tighter monetary policy that has been underway for months, shifting its monetary policy stance to "prudent" from "moderately loose."
-By China Bureau, Dow Jones Newswires; 86-21-6120-1200; djnews.shanghai@dowjones.com
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(END) Dow Jones Newswires
December 09, 2010 06:46 ET (11:46 GMT)
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