Sept. 25 (Bloomberg) -- Chinese banks said they've cut approvals for traders to enter into interest-rate swap agreements with international finance companies to avoid losses as credit markets collapse.

China Citic Bank Corp. introduced tighter limits for swaps with overseas banks after the failure of Lehman Brothers Holdings Inc., according to Guan Jiaying, the bank's interest-rate swap analyst in Beijing. Traders are favoring domestic counterparties for the contracts, which involve swapping fixed for floating rates, said Ye Yuzhang at Industrial Bank Co. in Shanghai.

``It takes longer for us now to get an internal approval to renew an IRS line with foreign banks if the current one expires due to our tighter risk controls,'' Ye said. ``If the prices offered aren't so different, we prefer to make such deals with domestic banks.''

Chinese lenders have increased swap trading in the past two years to hedge risks related to interest rate movements as the central bank raised borrowing costs to battle decade-high inflation. Last week, the People's Bank of China cut the one-year lending rate for the first time in six years after the economy slowed for a fourth quarter.

The nominal amount of interest-rate swap contracts traded between banks in China declined 25 percent to 3.75 billion yuan ($549.4 million) last week, from 5 billion yuan a week earlier, according to data compiled by the National Interbank Funding Center in Shanghai. Weekly volume touched 20 billion yuan earlier this year, according to Citic Bank's Guan.

Stricter Standards

The one-year interest rate swap, which is based on the 7-day repurchase rate, slid 1.3 basis points to 3 percent as of 2:02 p.m. today, according to rates compiled by Bloomberg. Swaps are derivative contracts used to guard against or profit from interest-rate fluctuations.

China's inflation rate exceeded 5 percent for 12 consecutive months through July before slowing to 4.9 percent last month. The central bank cut its one-year lending rate by 0.27 percentage point to 7.2 percent on Sept. 15.

China's four biggest banks, including Industrial and Commercial Bank of China, China Construction Bank Corp., Bank of China and the Agricultural Bank of China, all set stricter standards for approving credit lines for swaps to international counterparts, especially U.S. banks, according to people at the banks' treasury departments who declined to be named.

Swap Trading Shrinks

``Domestic banks have definitely become more cautious in dealing with foreign institutions after Lehman's bankruptcy,'' said Fan Xiulan, a Beijing-based fixed-income analyst with BOC International Holdings, the investment banking arm of Bank of China Ltd. ``Swaps trading shrank obviously recently.''

Citibank (China) Co. and JP Morgan Chase (China) Co. are the only two U.S. banks licensed for interest-rate swap transactions in China, according to a list of 62 financial companies posted by the National Interbank Funding Center. It includes 41 local firms. HSBC Holdings Plc, Deutsche Bank AG and Standard Chartered Plc are among the most active international lenders in the market, Industrial Bank's Ye said.

China's banking regulator denied a media report that it had banned the nation's lenders from offering credit to U.S. financial institutions. The South China Morning Post, citing people it didn't identify, reported today that the regulator ordered Chinese banks to halt inter-bank lending in all currencies to U.S. banks to avoid possible losses during the financial crisis.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net

Last Updated: September 25, 2008 02:31 EDT