Sept. 5 (Bloomberg) -- China will study the use of “regulatory tools” to adjust bank lending after the nation had a record 7.37 trillion yuan ($1.1 trillion) of new loans in the first half, a deputy central bank governor said today.

The People’s Bank of China will “study use of regulatory tools to adjust banks’ lending activity,” Deputy Governor Su Ning said at a forum in Shanghai, without elaborating. China’s central bank will also “emphasize” monitoring of asset price changes and watch international capital flows, he said.

China’s record credit expansion, which helped economic growth rebound to 7.9 percent in the second quarter, also raised concerns that bank loans have been diverted and used to buy shares and real estate, fueling gains in stock and property markets. Benchmark shares, which gained 57 percent this year, are in “deep bubble territory,” according to former Morgan Stanley Asia economist Andy Xie.

The China Banking Regulatory Commission will take “effective” steps to prevent bank loans from being diverted to the stock and property markets, the China Securities Journal reported today, citing Wang Huaqing, the regulator’s discipline chief. Banks that fake loans and earnings reports will also face harsher punishments, the report cited Wang as saying.

The regulator said Sept. 3 it will implement stricter capital requirements for banks, forcing them to deduct holdings of subordinated bonds issued by other lenders from their supplementary capital. That change will be implemented “over the course of several years,” it said.

Loan Growth

Regulators are still making changes to the draft rules on subordinated bond holdings, China Banking Regulatory Commission Vice Chairman Jiang Dingzhi said at the Shanghai forum today. The rules are being implemented to ensure capital quality and improve risk management, after the capital adequacy ratio of Chinese banks fell in the first half, Jiang said.

Loans surged in the first six months of this year after the central bank scrapped quotas limiting lending in November to support the government’s 4 trillion yuan stimulus package. The central bank has left interest rates and banks’ reserve requirements unchanged this year, stepping up bill sales last month to soak up some of the extra cash in the financial system.

Bank lending in China fell to 355.9 billion yuan in July, less than a quarter of June’s level. New loans in August may be 200 billion yuan, Caijing Magazine reported Aug. 31.

Stocks Slide

China’s benchmark Shanghai Composite Index fell 22 percent last month, entering a so-called bear market on concern slowing lending growth and tighter capital requirements would derail a recovery in the world’s third-biggest economy.

Premier Wen Jiabao this week pledged that the government will maintain “proactive” fiscal policy and “moderately loose” monetary policy to back economic recovery. Wen said last week that the nation’s economy still faced many uncertainties.

Bank of China Ltd. Executive Vice President Zhu Min said at today’s forum in Shanghai that the lender’s loan growth was “strong.” “Amid economic instability, support for the economy is important,” he said.

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Last Updated: September 5, 2009 01:42 EDT