HONG KONG: The hottest issue surrounding locally listed mainland banks at this hour is without question this: Will the mainland's banking regulator tighten the banks' capital requirements?

A spokesman for the banking regulator, the China Banking Regulation Commission (CBRC) said last week that there "won't be any sudden changes" in mainland banks' capital requirements. But that has not really answered the question.

However, some economists believe it is probable that the country's banking regulator will ultimately tighten capital requirements for mainland banks, as the central government takes steps to cap liquidity growth on fear of a potential asset bubble.

The banks' rampant lending this year, in support of the government's 4-trillion yuan stimulus package following the global financial crisis, has helped to send mainland asset prices soaring, with stock prices doubling from their lows in October last year and housing prices also surging.

Now with the growth in the mainland economy strengthening, the central government is setting its sights on the bubble threat. But there are limitations as to the measures that the central government could take.

"With the country's export sector and employment situation remaining weak, some heavy-handed tightening measures such as hikes in interest rates are not warranted right now," said Liu Xin, an economist at Bank of Communication, who specializes in mainland macroeconomic policies.

"It is very likely that the banking regulator will raise the capital adequacy ratios (CAR) for commercial banks as a mean of curbing liquidity," he said, adding that the central government has recently taken different measures to rein in liquidity growth.

For example, the CBRC issued a draft regulation late last month, asking banks to tighten the approval process for personal loans.

Personal loans in China have been rising, with new individual consumption loans approved in the first half of the year reaching nearly 651 billion yuan, up 60 percent from last year. Some of these loans have found their way into the equity market.

In another tightening move purportedly at the behest of regulators, banks have stopped providing incentives to buyers of a second home when approving mortgage loans.

All these tightening moves, including the potential hike in CARs, are merely meant to fine-tune the current accommodative monetary policy rather than to signal an outright exit from the policy, Liu said. "An outright exit from the stimulus measures won't come until the second quarter of next year." he predicted.

Qing Wang, Chief Economist for Greater China at investment bank Morgan Stanley, also believes mainland authorities are fine-tuning the accommodative monetary policy with various measures.

Although the policy tone of accommodative monetary policy remains intact, fine-tuning by the monetary authorities is under way, including the mopping up of liquidity through open market operations and reinforcing the CAR management of commercial banks, Qing said in a research report. "We consider this the 'end of easing' rather than the 'beginning of tightening'," he said.

In anticipation of this "end of easing", Qing expects "broadly benign growth of new bank credit in the remainder of this year, such that the total new loan creation would reach close to 10 trillion yuan for 2009 as a whole".

Economists believe that a hike in CARs will likely force banks to slow down their lending business. They may also need to raise new capital in the market. This will have help to cap liquidity growth.

(HK Edition 12/04/2009 page1)