THE country’s credit curbs might result in rising bad loans in the second half of this year, and authorities needed to be cautious about tightening further, a senior regulator said Friday.

Although banks’ loan books remained healthy right now, problems might arise later, Yu Xuejun, head of the Jiangsu bureau of the China Banking Regulatory Commission (CBRC), told reporters.

“If the current degree of tightening is maintained, banks will continue to face tight liquidity, their asset quality may worsen and then their non-performing loans may rise in the second half,” he said in an interview in Beijing.

He was echoed by a CBRC official in Beijing, who said non-performing loans could start to rise as early as the second quarter due to a deteriorating economic environment.

“We’re noticing problems as a result of the tight monetary policy,” the Beijing official said. “This year is shaping up as a very challenging year.”

Yu is the lead banking regulator in Jiangsu, a thriving coastal province that is a major manufacturing hub.

To cool investment and keep inflation in check, the government raised interest rates six times last year. So far this year it has raised the proportion of deposits that banks must place at the central bank three times following 10 increases in 2007.

The central bank has also ordered banks to limit the increase in new lending in 2008 to about last year’s sum of 3.63 trillion yuan (US$520 billion).

However, Yu said the regulators should replace this annual quota with more market-oriented measures, such as cutting the loan-deposit ratio. In China, banks may lend out no more than 75 percent of the deposits they take.

He also warned of the possibility of over-tightening, saying that many labor-intensive companies and exporters in his province, especially small firms, were feeling the pinch. As a result, some were turning to the kerb market for funds.

Although the government has been trying to develop the stock and bond markets so that companies can diversify their financing channels, most of their funding still comes from banks.

Yu warned that more rises in reserve requirements, already at 16 percent, could deal a fresh blow to some small lenders.

Liquidity pressures on these banks have eased in recent months as asset prices have cooled, discouraging people from taking money out of the bank to invest in shares and property.

(SD-Agencies)