China's more than 120 small and medium-sized banks should beef up capital and make sure they have set aside enough for bad loans in case of a credit crunch, the nation's banking regulator said.

Medium-sized banks had put aside enough money to cover 115 percent of their sour debt at year's end, while city banks had provided enough for 72.3 percent of their bad loans, the China Banking Regulatory Commission said in a statement yesterday.

The banks need to guard against liquidity risks "under any circumstances," the statement said. A possible United States recession and tighter credit controls may lead to more defaults among China's corporate borrowers, Standard & Poor's said last month.

China has ordered banks to curb lending as the government identifies overheating and inflation as major economic risks. The central bank raised interest rates six times last year and has boosted the ratio of deposits lenders must hold as reserves to 15 percent, the highest in more than 20 years.

The lenders had an average bad-loan ratio of 2.45 percent by the end of last year, compared with 6.17 percent for the entire industry, the regulator said. Their capital adequacy ratio was 10.57 percent, above the eight percent required minimum.

Twenty of the banks have sold stakes worth 30 billion yuan (US$4.2 billion) to foreign investors.

(Shanghai Daily March 14, 2008)