UPDATE 3-China denies shunning foreign banks

Thu Sep 25, 2008 5:46am EDT

(Adds CBRC warning on avoiding contagion from financial crisis)

By Samuel Shen

NANNING, China, Sept 25 (Reuters) - China's banking regulator sought to reassure jittery financial markets on Thursday, denying a report it had told local banks to stop lending to U.S. banks and stressing that foreign bank operations in China were healthy.

"The CBRC has never, through any channel, issued a statement or told domestic commercial banks not to lend to or borrow from U.S. financial institutions," the China Banking Regulatory Commission said in a statement on its website.

CBRC Vice Chairman Wang Zhaoxing told Reuters that a report in the South China Morning Post, which said the agency had told Chinese banks to stop lending to U.S. banks in the interbank market, was not correct.

"If they are not willing to lend, this is the normal practice of risk control," said Wang, speaking on the sidelines of a major banking conference.

The CBRC later said the SCMP report was irresponsible.

Dealers at some Chinese and foreign institutions, who declined to be identified because of the sensitivity of the issue, said U.S. and some other foreign banks were finding it harder to borrow from the market.

Some Chinese banks have temporarily stopped offering new lending to U.S. banks, in yuan and other currencies, because of uncertainty about risk, three traders said. Similar caution in lending has been seen in markets around the world.

"We have had difficulty borrowing money from Chinese banks since the start of this week," said a dealer at the branch of a U.S. bank in Shanghai.

In a statement, Citibank China, part of Citigroup, said: "We continue to conduct business as usual."

A spokeswoman for Bank of Communications, one of China's five biggest banks, said it was continuing "normal" trade with foreign banks in the interbank market, although she added that it would carefully monitor risks.

Foreign banks have boosted their presence in China's money markets since last year, when they were allowed to begin incorporating locally. They borrowed $51 billion from the interbank market in January-June, accounting for 14 percent of total borrowing.

AVOIDING CONTAGION

The CBRC's Wang said he did not expect problems at Bank of East Asia (BEA), the fifth-largest lender in Hong Kong, to spread to the mainland.

On Wednesday, thousands of customers withdrew cash from BEA branches in Hong Kong as rumours circulated about its financial stability. The bank denied the rumours and alerted the police.

Wang said Bank of East Asia's China-incorporated unit was operating independently from its parent under Chinese regulatory standards, and had adequate capital.

"Foreign banks' operations in China are very stable and healthy," Wang said, adding: "China's economic situation is healthy."

BEA shares rallied on Thursday after billionaire Li Ka-shing bought up stock, but hundreds of nervous customers continued to withdraw their savings.

However, underlining regulators' concern about potential contagion from the global financial crisis to China, CBRC chief Liu Mingkang on Thursday warned domestic lenders that they must closely monitor risks and take necessary steps to prevent them from spreading to the country.

"Chinese banks are facing ever tougher international competition and the possibilities are increasing for them to be affected by the global financial crisis," Liu said in written remarks distributed at the conference.

"In line with the current situation, especially the impressive lessons from the subprime crisis, all banks should not only actively fend off potential risks from economic corrections, but also effectively prevent liquidity, market and operative risks resulting from the changing market environment," he added. (Additional reporting by Lu Jianxin and George Chen in Shanghai and Eadie Chen in Beijing) (Writing by Alan Wheatley; Editing by Lincoln Feast)

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