Beijing: Surging bank lending could threaten the stability of financial institutions in fast-growing China, the OECD said on Tuesday in a report that urged more market reforms to help reduce such risks.
The Organisation for Economic Cooperation and Development said in its first China survey for five years that while Beijing`s policies had helped shield the country from the world slowdown, excess government controls were a problem.
It recommended China loosen its grip on the value of the yuan and further accelerate other market-based economic reforms, including allowing greater foreign access to its financial markets.
The report identified the recent surge in new lending as a key problem facing the nation`s economy and financial system.
"While Chinese banks have so far weathered the global slowdown well, the acceleration in new lending since early 2009 raises the risk of a renewed surge in non-performing loans (NPLs) in the years ahead," the report said.
The lending binge has emerged as a key concern for China`s economic policymakers, with Liu Mingkang, chairman of the China Banking Regulatory Commission, saying last month the government would rein in credit.
His comments come after the central bank moved to hike the minimum amount of money that banks must keep in reserve and took other steps analysts said were meant to curb lending amid fears of bad loans, asset bubbles and overheating.
Chinese state media also has reported major banks were verbally ordered by authorities to cut new lending, although Liu denied such a move.
Some analysts have said they expect Beijing to go even further by raising interest rates, but most have said such a move is unlikely before mid-2010, as it could fuel inflation.
"We welcome measures recently taken by authorities to deal with inflationary pressures, but we think this will have to be carefully monitored," OECD Chief Economist and Deputy Secretary General Pier Carlo Padoan told reporters.
"Inflation risks are coming up in a way that is a source of concern."
The OECD report said recent "sharp increases in land prices" stemmed partly from excess liquidity and it warned financial institutions could be stuck with bad loans if property prices fell.
Property prices in Chinese cities have soared, rising in December at the fastest pace in 17 months, according to official figures.
Senior OECD economist Richard Herd said wage increases had outpaced the spike in housing costs nationwide, but noted the huge rises in Beijing, Shanghai and southern China.
He said it was important to avoid a spread in high property prices while also keeping the housing market going, noting: "The key is an increase in the supply of land."
The price surge accelerated after Beijing responded last year to the world economic woes with tax breaks, easy bank loans, lower down payment requirements and by calling on banks to pump up lending to keep the economy growing.
As a result, new loans nearly doubled in 2009 from the previous year to 9.59 trillion yuan (1.4 trillion dollars), according to government data.
The Paris-based OECD called bad loans "perhaps the most significant near-term risk" to Chinese financial institutions.
It advised lifting ceilings on foreign investment in banks to "put pressure on these institutions to upgrade their governance, management and technical capabilities, and would facilitate their international expansion."
It also advised China`s leaders to move more quickly toward freeing up the yuan.
The Chinese currency`s value -- effectively pegged to the US dollar since mid-2008 -- has been a bone of contention between Beijing and its Western trading partners, who say it is kept low to boost exports.
The OECD said allowing the yuan to trade more freely would bring stability by allowing its value to adjust "to offset macro shocks."
"More rapid capital account liberalisation would bring tangible benefits and could be achieved without serious risk to financial or macroeconomic stability," it said.
However, China has resisted such calls, with Premier Wen Jiabao saying in December it would not yield to outside pressure to allow the yuan to appreciate.
The OECD groups 30 industrialised economies and is a centre for studying macroeconomic and social trends and advising governments on policy.