The China Banking Regulatory Commission said on Monday it will support local governments that want to use financing vehicles to meet "reasonable" credit demand in 2013.

It also pledged to support large ongoing construction projects and ward off systemic and regional risks.

In a statement released at the end of its annual work conference, the regulator said: "We will be especially cautious about risks related to loan defaults, banks' off-balance- sheet business and risks that might spill over from private finance to the banking system."

The amount of bad loans for Chinese lenders has increased for four consecutive quarters, reaching 478.8 billion yuan ($76.94 billion) by the end of September. Their ratio of non-performing loans to total loans was 0.95 percent by the same date.

Regulators and analysts consider lending to local government financing vehicles and the property industry to be among the main sources of credit risk.

Policymakers' desire to shore up China's economy has led to a loosening of the credit controls imposed on financing vehicles and the property market, analysts said.

"If we look at the amount of the loans that were made to the vehicles and were supposed to mature as well as the actual amount of loans that soured in 2012, we can conclude that banks rolled over a large number of loans," said Hu Bin, a Moody's vice-president and senior analyst.

One possibility that cannot be ruled out is that some mature loans were repaid using new borrowing from banks, said Guo Tianyong, a professor at the Central University of Finance and Economics.

According to a survey conducted by the China Banking Association last month, nearly 60 percent of Chinese bankers say they're concerned about the risks that stem from lending to local governments and nearly 70 percent are worried about property loans.

Loans in both categories are expected to register relatively high non-performing loan ratios in the next three years.

Although analysts expressed concerns that banks are over lending to local government financing vehicles, more than half of the bankers surveyed said they support the practice of rolling over mature loans.

They said the practice offers a means of ensuring projects have good cash flow and that the loans will eventually be repaid following a grace period, according to the survey.

More than 31 percent said the measures are commonly used by commercial lenders and should not be prohibited.

The central bank said on Friday that it will support the real economy, or the part of the economy pertaining to goods and services, by ensuring the credit supply and social financing increase steadily in 2013.

As for property loans, the China Banking Regulatory Commission also said it will strengthen the stress tests lenders are subject to.

And it is placing an emphasis on the need to monitor and control lenders' off-balance-sheet business.

In December, it required banks to tighten their controls on the sale of third-party financial products, such as insurance, trust products and investment funds, especially those made through their branches.

The order came after a product that Hua Xia Bank sold through one of its branches failed to pay out upon maturity in November, triggering investor protests.

"We will prevent the risks of private and illegal financing from spilling over into the banking system," the regulator said, adding that banks and bank employees cannot participate in private financing.

wangxiaotian@chinadaily.com.cn

(China Daily 01/15/2013 page14)