The watchdog also ordered them to stop using "informal securitisation" after banks sold or transferred 2.3 trillion yuan in loans to trust companies to evade strict regulatory requirements, the Financial Times said.

The loans have been repackaged into investment products and sold to investors -- a practice blamed for exacerbating the global financial crisis, the report said.

"We've learnt the lesson of the financial crisis and we realise we need to strengthen oversight over this phenomenon," an unnamed senior official at the China Banking Regulatory Commission was quoted as saying.

The regulator would not immediately comment when contacted by AFP.

China has sought to curb rampant bank lending this year after new loans nearly doubled to 9.6 trillion yuan in 2009, fuelling fears of a damaging bubble in the property sector and a possible surge of bad debts.

Authorities have set a loan target of 7.5 trillion yuan for this year and ordered banks to increase the amount of money they keep in reserve, effectively limiting the amount they can lend.

To get around these restrictions, banks are increasingly moving loans off their balance sheets through "informal securitisation", which Fitch Ratings said last month was masking the true extent of bank lending and bad debts exposure.

Chinese banks officially issued 4.6 trillion yuan (679 billion dollars) in new loans in the first half of this year, but the actual figure was probably closer to 5.9 trillion yuan if off-balance sheet loans are included, Fitch said.

At the end of the first half, Fitch estimated that more than 2.3 trillion yuan in outstanding loans was sitting off the balance sheets of Chinese banks in investment products -- a more than tenfold increase from the end of 2007.

Putting this money back on to the banks' books will strain capitalisation and loan-to-deposit ratios and could force some banks to raise capital, the Financial Times said.

The official Shanghai Securities News said the regulator wanted the loans back on the banks' books by the end of 2011.

earlier related report
China's inflation up after devastating floods
Beijing (AFP) Aug 11, 2010 - China's consumer inflation accelerated in July, the government said Wednesday, as the nation's worst floods in a decade wiped out crops and disrupted transport links, driving up food prices.

Other key indicators showed the world's third-largest economy was slowing after Beijing moved to wind back massive stimulus spending, close inefficient factories, and curb soaring property prices and bank lending.

The closely watched consumer price index, a key measure of inflation, rose 3.3 percent in July, compared with 2.9 percent in June, due in large part to "dramatic weather and serious floods", the National Bureau of Statistics said.

But spokesman Sheng Laiyun insisted China could keep prices "basically stable" for the year and meet the government's three-percent inflation target.

"Generally speaking, there are more factors that will curb price rises than factors that will fuel price rises," Sheng told reporters, pointing to slowing economic growth and the government's efforts to curb lending.

But he warned that wage hikes and commodity price rises, as well as increases in international grain prices, could push consumer prices higher.

Russia, battling a record drought and massive wildfires, shocked commodity markets last week by suspending wheat exports, triggering warnings of across-the-board price rises in global staples such as meat, bread and beer.

Industrial output from China's millions of factories and workshops slowed in July, rising 13.4 percent year-on-year compared with 13.7 percent in June.

Fixed asset investment in urban areas, a measure of government spending on infrastructure, rose 24.9 percent over the January-July period, compared with 25.5 percent a year ago as Beijing reined in spending.

Retail sales, a key measure of consumer spending, rose 17.9 percent on-year.

Analysts said the data adds to mounting evidence that the Chinese economy is losing steam as the government maintains tightening measures introduced this year to avert overheating in the red-hot economy.

"I think the picture is pretty clear that the entire economy is slowing," Ken Peng, a Beijing-based economist for Citigroup, told AFP.

"The government is probably not hitting the panic button yet because even though the direction is clear, growth is still at a relatively high level."

Government data released earlier showed that imports slowed for the fourth straight month in July, while property prices rose at a steadier pace and manufacturing activity contracted for the first time in 16 months.

China slowed in the second quarter, growing by 10.3 percent compared with a sizzling 11.9 percent in the first three months, but the government has warned that it expects the economy to slow in the second half.

The sharp rise in consumer prices, however, could continue in the months ahead, forcing policymakers to tighten interest rates, said Brian Jackson, a senior analyst at the Royal Bank of Canada in Hong Kong.

"We expect China will join the regional trend in favour of gradual policy normalisation sometime soon, forecasting an initial rate hike in the fourth quarter of this year," he said.

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