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Chinese banks lend aggressively in early July, risking another crackdown

An employee carries bundles of 100 yuan Chinese bank notes to store after counting at a bank in Taiyuan, Shanxi province July 4, 2013. REUTE
An employee carries bundles of 100 yuan Chinese bank notes to store after counting at a bank in Taiyuan, Shanxi province July 4, 2013. REUTE

SHANGHAI (Reuters) - New local currency yuan loans extended by China's big four state-owned banks stood at an unusually large 170 billion yuan ($27.7 billion) in the first week of July, the official Shanghai Securities News said on Thursday, a move that may alarm regulators trying to strangle distorted credit growth.

Traders said similarly aggressive lending by Chinese banks in early June caused the central bank to set off an acute liquidity squeeze in the country's interbank market.

The credit crunch caused a panic among money dealers, provoking a dramatic decline in domestic equity indexes and raised international concern about the health of the country's financial system.

New loans extended in early July by the big four banks -- the Industrial and Commercial Bank of China <601389.SS> <0398.HK>, China Construction Bank <601939.SS> <0939.HK>, Agricultural Bank of China <601288.SS> <1288.HK> and Bank of China <601988.SS> <3988.HK> -- were unusually high compared with the estimated 270 billion yuan for all of June, the newspaper said.

"The abnormality is believed to be a burst of new lending after restrictions at the end of June," the report said.

In the beginning of June the big four banks extended 217 billion yuan in new loans in the first 10 days.

Traders said the People's Bank of China (PBOC) convened a meeting in response, warning banks of aggressive lending, and pointing out that some banks had borrowed short-term money on the money markets and used it to extend medium- and long-term loans -- a mismatching of assets and liabilities which increased systemic risk.

The PBOC followed up by refusing to inject liquidity at a large scale even as appetite for cash increased sharply, causing short-term rates to set all-time record highs with some tenors rising from their customary 3-4 percent range to as high as 25-30 percent.

The report said part of the reason for the jump in lending is cyclical, as cash returns to the system after the end of the first-half reporting period.

Chinese banks are required to meet regulatory tests of financial soundness, including a 75 percent loans-to-deposit ratio, at the end of each month, and they frequently tap the interbank market for cash to do so, causing temporary upward pressure on short-term rates.

($1=6.1341 Yuan)

(Reporting by Lu Jianxin and Pete Sweeney; Editing by Shri Navaratnam)

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