Bank of China, Construction Bank tighten loan rules

* Two of China's largest banks tighten loan rules

* China's regulator to soon issue lending guidelines - paper

* Authorities worry funds may be flowing into stock market

(Recasts and adds details)

By Samuel Shen and Jacqueline Wong SHANGHAI, April 16 (Reuters) - Bank of China and China Construction Bank, two of the country's biggest lenders, are tightening loan rules and increasing scrutiny on the use of borrowings, as explosive growth in lending fuels risk concerns.

Bank of China <3988.HK><601988.SS> has issued guidelines to its branches to monitor borrowers and the flow of loan capital as part of efforts to limit risks while continuing to maintain rapid business growth, sources familiar with the situation said.

Construction Bank <0939.HK><601939.SS> has started to inspect consumer loans, to ensure they are used for their intended purposes and not for speculation on the stock market, two bank officials familiar with the situation said.

The China Banking Regulatory Commission will soon issue stricter lending guidelines to banks to ensure proper use of loans, the official China Securities Journal reported on Thursday.

New rules will call for stricter enforcement of direct payment of loans to the borrower and direct repayment from the borrower, the paper said, citing a source familiar with the situation.

Bank of China could not be immediately reached for comment while Construction Bank declined to comment.

New lending has soared in China, with banks extending a record 1.89 trillion yuan ($276.6 billion) in loans in March, up from already high levels of 1.07 trillion yuan in February and 1.62 trillion yuan, the previous monthly record, in January.

The government has urged banks to lend to support an economy that slowed to 6.1 percent during the first quarter from double-digit annual growth seen not long ago.

While the surge in lending has bolstered hopes for an early recovery in the world's third-largest economy, it has also triggered worries that much of the money may be finding its way into the stock market, and banks' asset quality might suffer in the long term.

"Banks face the contradictory tasks of supporting economic growth and controlling lending risks," said Qiu Zhicheng, analyst at Guosen Securities Co. "Explosive lending benefits banks in the short term, but bad loans may emerge eventually."

"Some companies have already seen operational or financial difficulties while relatively good firms also face increasing short- and long-term uncertainty," sources cited a Bank of China document as saying. "We must strengthen management of new loans, to ensure rapid and healthy development of our business."

Construction Bank has started tracing consumer loans extended since last October to ensure they do not flow into the stock market, or else the loans will be called back, according to an official with direct knowledge of the matter.

The Chinese stock market's benchmark Shanghai Composite Index <.SSEC> has surged nearly 40 percent this year and was the best-performing stock market among the world's large bourses in the first quarter.

Meanwhile, nearly 40 percent of new lending in January was in short-term bill financing, typically used by companies to meet immediate cash needs rather than for long-term investments, although that proportion had fallen to about 20 percent in March.

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Bank of China Profit Falls 59%

Fourth-Quarter Drop Shows How Dismal Global Investment Affects the Nation's Big Lenders

SHANGHAI -- Bank of China Ltd. posted a 59% slump in fourth-quarter net profit as its overseas investments were hit by the global financial turmoil.

Associated Press

President Li Lihui said the bank's purchase of a 20% stake in Cie. Financiere Edmond de Rothschild will likely be approved by Chinese regulators soon.

Full-year profit at the smallest of China's Big Four banks rose 14%, but the drop at the end of the year, after a 32% gain in the first nine months, gave an indication of how the weakening domestic economy and a deteriorating global investment climate are affecting Chinese banks.

Despite the setback, the bank said expanding beyond its home market remains key to its development strategy.

The state-run bank said 2009 will likely be tougher for it because of the slowdown in the domestic economy and its exposure to overseas markets.

Bank of China, which has the biggest investment in U.S. subprime securities of all Asian financial institutions at $2.59 billion, said it had set aside $2.25 billion to cover potential investment losses at the end of last year.

Reuters

President Li Lihui said the bank's purchase of a 20% stake in the French private bank Cie. Financière Edmond de Rothschild will likely be approved by Chinese regulators soon. 

Why China Can't Save the World?

1:09

Some are looking to China to help jump-start the global economy, but it might not even be able to help itself. Its people don't spend enough to offset the sudden thriftiness of U.S. consumers. Barron's Clare McKeen reports.

The original Dec. 31 deadline to complete the deal passed without a blessing from authorities in China, so Bank of China has extended the cutoff to March 31. Analysts said Beijing hasn't approved the purchase because of concerns about investment risks amid global financial volatility, though they said a deal with Rothschild could provide Bank of China expertise in asset management as well as distribution in Europe.

The bank's fourth-quarter net profit fell to 4.42 billion yuan ($646.8 million) from 10.77 billion yuan a year earlier.

Net profit for the full year rose to 64.36 billion yuan from 56.25 billion yuan in 2007.

The 14% full-year gain lagged the 40% rise in net profit at Bank of Communications Co. because of Bank of China's larger exposure to overseas assets.

Royal Bank of Scotland Group PLC and UBS AG have both sold their stakes in Bank of China in recent months, removing an overhang on the Chinese lender's stock.

Hong Kong-listed shares of Bank of China have gained 12% since the start of the year, beating the 6.4% rise in China Construction Bank Corp. Stock in Industrial & Commercial Bank of China Ltd. has fallen by 13%.

China's $200 billion sovereign-wealth fund marginally increased its stake in the state-run bank to 67.52% at the end of last year. Singapore's Temasek Holdings owns a 4.13% stake in Bank of China.

—Rose Yu, Amy Or and Aries Poon

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