The China Banking Regulatory Commission announced Tuesday that it will be conducting spot-checks on bank loans granted in select sectors as part of its effort to rein in credit growth and reduce risk.

Inspectors will be sent to seven provinces, including Guangdong in the south and Jiangsu in the east, to examine loans given to companies in the steel, aluminum, cement, real estate and automobile sectors.

The China Development Bank--a policy bank that lends primarily for infrastructure projects--the Big Four state-owned commercial banks, the 11 joint-stock commercial banks and rural credit cooperatives will be inspected.

The rapid increase in loans in the past few months has fueled excessive investment in the five sectors slated for inspection. They have also pushed China's monetary growth to levels that many fear will lead to inflation and erode robust economic development.

China's money supply growth eased slightly last month, which some analysts said was a sign that last year's monetary policy was still working, but inflationary pressure remains.

Broad money supply, M2, which covers cash in circulation and all deposits, rose 19.2 percent year-on-year in March, according to People's Bank of China (PBOC) Governor Zhou Xiaochuan.

The pace was slower than the 19.4 percent recorded at the end of February, but outstripped the central bank's full-year goal of 17 percent.

"It appears the effect of last year's monetary policy is showing," said Zhang Liqun, a senior analyst with the Development Research Center, a State Council think tank.

The central bank seems to be on the way to achieving its goal of curbing only excessive monetary growth, but how the coming months will shape up is difficult to say, said Zhang.

"It's a good sign, but we need to see how much this year's monetary policy can help," Zhang said.

Worried that rapid credit growth may fuel inflation, the PBOC announced on Sunday that reserve requirements for commercial banks would rise half a percentage point to 7.5 percent on April 25. The increase will not affect rural credit cooperatives.

The higher reserve will freeze approximately 110 billion yuan (US$13.3 billion) in commercial banks' liquidity.

Yet analysts say the hikes are hardly enough to harness the rapid increases in bank loans, given the strong desire by local governments and the private sector to invest. A huge part of China's fixed investment is funded by bank loans.

Many local governments are eager to tap into the new round of economic growth, encouraging investment by handing out preferential land and electricity use policies.

Private capital also keeps flowing into fast-growing sectors as China lifts investment restrictions.

"The investment impetus is just tremendous," said Wang Yuanhong, a senior analyst with the State Information Center.

The central bank raised bank reserve requirements by 1 percentage point to 7 percent in September last year to restrict the banks' lending capacity.

Loan growth subsided slightly in the following months, but picked up again in the first two months of this year.

(China Daily April 14, 2004)