The China Banking Regulatory Commission has blocked banks' lending to other financial institutions such as lending companies, pawnshops, guarantee companies and private financing activities amid a cash crunch.

The CBRC has issued a directive to its local bureaus and commercial lenders, ordering banks to include external risks related to such financial institutions in their risk management system, the Shanghai Securities News reported on Thursday.

The document ordered headquarters of banks to establish unified standards and branches to make a list of specific institutions that are qualified for cooperation, said the newspaper, citing anonymous sources.

The commission also told banks to review the list at least once a year and remove institutions that have engaged in illegal behavior or pose significant risks.

Banks should also rate the financial institutions that they cooperate with and extend credit accordingly.

"Lending to pawnshops and non-financing guarantee companies is prohibited," said the document.

Regulators have kept a closer watch on shadow-banking activities and spillover risks from one financial system to another, said Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics.

The CBRC's move comes amid the worst cash crunch in a decade. The seven-day repurchase rate, an indicator of interbank funding availability, rose 270 basis points to 10.77 percent in Shanghai on Thursday, the highest since March 2003, according to data from Bloomberg.

The one-day rate increased by 527 basis points to a record high of 12.85 percent.

Louis Kuijs, chief China economist at the Royal Bank of Scotland, said tighter financial conditions will affect the non-bank sphere, where lending has been rising rapidly recently and risks have built up.

"While we do not think the financial risks are large and systemic enough to overwhelm macroeconomic and financial stability in China, parts of the non-bank financial system may be particularly sensitive to tighter monetary conditions and regulation."

According to a financial stability report released by the People's Bank of China on June 7, China had 6,080 lending companies, 9,071 financing guarantee companies, and 6,084 pawnshop companies at of the end of 2012.

"Some of these institutions have participated in illegal financing activities and disturbed the financial order," said the report.

It said fund sources of private lending have become entangled with the mainstream financial system, "and once the funding chain breaks, risks would spread to traditional lenders and cause regional events and emergencies".

On Wednesday the State Council said the prudent monetary stance should persist to ensure reasonable management of the money supply, and banks should step up efforts to contain financial risk.

wangxiaotian@chinadaily.com.cn

(China Daily USA 06/21/2013 page17)