The China Banking Regulatory Commission (CBRC) said Tuesday it plans to conduct inspections, on a selective basis, on bank loans granted to rapidly-growing sectors like real estate in its latest bid to curb fast credit growth and stave off financial risks.

Inspectors will be sent to seven provinces, including South China's Guangdong and East China's Jiangsu, to examine bank loans given to companies in the steel, aluminium, cement, real estate and automobile sectors, the commission said.

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

The rapid increase in loans in the past few months has fuelled over-investment in the five sectors slated for inspection.

They have also pushed China's monetary growth to high levels that many fear would lead to inflation and erode its robust economic growth.

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

Broad money supply M2, which covers cash in circulation and all deposits, rose by 19.2 percent in March on a year-on-year basis, the Financial News newspaper Tuesday quoted central bank Governor Zhou Xiaochuan as saying.

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 moves is showing itself," said Zhang Liqun, a senior analyst with the Development Research Center, a think tank under the State Council.

The central bank seems to be on the way to achieving its goal of curbing rapid monetary growth without disrupting necessary growth, but how the coming months will shape up is difficult to say, he explained.

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

Worried that rapid credit growth may fuel inflation, the People's Bank of China raised reserve requirements - set to take effect on April 25th - for some commercial banks by half a percentage point to 7.5 percent late last month.

The bank announced on Sunday an across-the-board increase in reserve requirements, also by half a percentage point, for all financial institutions except credit cooperatives.

The two increases will take effect on the same day.

The central bank said the hike will freeze an estimated 110 billion yuan (US$13.3 billion) in bank reserves.

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 make new investments. 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 favorable 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.

Chinese banks lent aggressively last year to tap into recovering economic activity, pushing the money supply to high levels and prompting worries that accelerating prices may erode the robust economic growth.

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, with M2 rising by an annualized 19.8 percent, 1.3 percentage points faster than one year earlier.

(China Daily April 14, 2004)