China Tightens Stimulus Lending Controls to Fight Abuse

China’s banking regulator is tightening controls on lending to prevent abuses, as auditors reported that some spending for economic stimulus programs is being diverted or delayed.

The new rules, announced by the China Banking Regulatory Commission late Tuesday, apply to bank loans worth more than 5 million yuan ($732,000) or accounting for more than 5 percent of the total investment in a project.

They require banks to hold loans until project contracts are finalized and to disburse the funds directly to the businesses supplying goods and services. The aim is to make it more difficult for project managers to embezzle or otherwise misuse the money.

The banking regulator said it was seeking public opinion on the rules until June 16.

China’s banks issued 5.2 trillion yuan ($760 billion) in new loans in January-April alone, exceeding the minimum target for the year, as authorities rushed projects backed by a 4 trillion yuan ($586 billion) economic stimulus package that aims to combat fallout from the global slump.

The lending spree has raised worries that some of the money may not be used as intended and is being diverted for other purposes, such as stock trading or other investments.

Such practices are a chronic problem for China, and the rules announced Tuesday were drafted over two years.

But the National Audit Office said in a report released earlier this week that it found that local governments were failing to disburse funds allocated for projects, causing delays and other problems.

Less than half of the funding due from local governments had been invested, it said.

In other cases companies used bank project financing for investment purposes, the audit office said in its report on 335 projects initiated in the first quarter of the year.

The report gave no specific examples.

But state media have recently carried numerous reports of banking officials warning of rising risks from the flood of stimulus-related lending.

Meanwhile, the Finance Ministry announced new support for some rural lenders, including banks and credit cooperatives.

Since most of the huge flood of bank lending has gone to big government infrastructure projects, authorities are looking for other ways to support cash-starved rural and small businesses.

Such moves are doubly important at a time when more than 20 million migrant workers from rural areas have reportedly lost their jobs in factories devastated by plunging demand for China’s exports.

To qualify for the subsidies, which would equal 2 percent of the institutions’ loan books, the lenders must have expanded lending in the past year and have a loan-deposit ratio of 50 percent or more, the ministry said in a statement on its Web site.

5/20/2009 6:23 AM SHANGHAI (AP)