China's banking watchdog on Monday started a special inspection of the loan business of commercial banks to curb potential financial risks as soaring lending has led to fears of an over-heated economy among both officials and economists.

Sources said the China Banking Regulatory Commission (CBRC) campaign is mainly targeted at the Big Four State-owned commercial banks - China Construction Bank, Agricultural Bank of China, Industrial and Commercial Bank of China and Bank of China.

All provincial and some county-level branches of these banks will be covered by the inspection.

Besides assessing the overall operations of the Big Four, inspectors will concentrate on analyzing the reason for the quick expansion of loans in the first half of this year, their loan structure and possible risks.

The regulatory move came after the People's Bank of China (PBOC) pointed to an accelerated growth in new loans at all financial institutions.

Statistics from the central bank showed that outstanding loans (in both local and foreign currencies) of all financial organizations soared by 23.9 per cent to 16.9 trillion yuan (US$2.04 trillion) between January and August, the highest growth since August 1996.

In the same period, outstanding loans in renminbi totalled 15.3 trillion yuan (US$1.85 trillion), posting a year-on-year rise of 23.9 per cent.

Meanwhile, new loans by commercial banks between January and July jumped to 1.9 trillion yuan (US$228.8 billion), more than the 1.8 trillion yuan (US$217 billion) that they lent in all of 2002.

The fast growth was maintained despite a string of measures taken by the central bank to tighten lending.

Zhou Xiaochuan, governor of the PBOC, has long warned that the acceleration in loan expansion may ignite inflation.

Since April, the PBOC has issued central bank bills worth about 60 billion yuan (US$7.3 billion) in a bid to whittle down base money.

It then even took the drastic step of raising the ratio of deposits required by commercial banks - the percentage of deposits that banks must hold as reserves - from 6 per cent to 7 per cent to further reduce money in circulation.

The move aimed at mopping up about 150 billion yuan (US$18.2 billion), starting from September 21.

Even financial experts who earlier deemed the rise in lending as "reasonable and normal" have begun to feel worried.

"It needs more observation to fully know what the explosive increase in loans will bring to the economy," said Xia Bin, a researcher with the Development Research Centre of the State Council.

The cautious attitude contrasted with his optimistic forecast in June that the growth of loans for the full year could be contained within 23 per cent; and that the lending rise would have little negative impact on the national economy.

Yi Xianrong, a senior researcher with the Institute of Financial Studies under the Chinese Academy of Social Sciences, went as far to caution that the excessively-high growth in loans poses a threat to both the overall economy and the financial sector.

On the one hand, the loan rise has led to local government-dominated investment mania in a wide range of industries. Over-capitalization now has hit sectors such as steel, aluminum, cement, automobile and real-estate industries, according to government data.

On the other, the blind investment fever tends to result in more bad loans for commercial banks, especially the Big Four.

"If so, the banking reform and even the country's robust economic growth will be threatened," said Yi.

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