China looks to limit interbank lending Chinese regulators are set to place new limits on interbank loans after banks exploited a loophole to ratchet up leverage in the financial system, according to draft rules. The rules, which are not yet public but have been circulated widely among Chinese banks and have been reviewed by the Financial Times, would mark the latest move by regulators to crack down on the burgeoning business of off-balance sheet lending. However, as with previous such attempts, analysts say there appears to be enough leeway in the new regulations for banks to continue their off-balance sheet business in slightly different guises. The result is expected to be a slowdown, not a halt, in the rapid build-up of credit in the Chinese financial system seen in recent years. China's regulatory focus on interbank lending follows a 140 per cent increase in interbank assets at listed Chinese banks over the past three years, according to Citigroup. The steepest rise has been at mid-tier banks, where interbank exposures have more than tripled since 2008 and now form 21 per cent of their assets, according to Bernstein Research. The reason for the explosion in interbank financing is that it allows banks to evade a series of regulatory limits. By routing corporate loans through other banks and hence booking them as interbank products, they can post less capital and also do not need to count the credit towards the loan-to-deposit ceiling that might otherwise tie their hands. The China Banking Regulatory Commission is looking to establish three hard caps on the interbank market, according to the draft of what is known as "document no. First, lending to any single financial institution should not exceed 100 per cent of a bank's net capital. Second, lending to non-bank financial institutions should not exceed 25 per cent of a bank's net capital. Third, lending to all financial institutions should not exceed 50 per cent of a bank's total deposits. Among other measures, the CBRC proposed limiting the duration of interbank loans to a maximum of one year and preventing banks from rolling them over at maturity. It also said that banks would have to set more capital aside against interbank assets, without quantifying an amount. They could do more because these current rules look quite ineffective. Maybe they will ban more products later on, but even still there are enough workarounds for banks," said one analyst who was not authorised to speak to the media. Despite all the various restrictions in place, the total amount of credit in China is likely to reach 218 per cent of gross domestic product by the end up 2013, up from just about 130 per cent in 2008, according to Fitch Ratings. In the draft rules, the CBRC said the aim was "to standardise interbank financing operations between commercial banks and financial institutions, and to promote the healthy development of the interbank financing business." The CBRC news office did not reply to a request for comment.