Aug. 4 – The China Banking Regulatory Commission is set to tighten banks capital rules by excluding subordinated bonds sold to other banks from their capital base.

The regulator has sounded out banks concerning the plan, according to the South China Morning Post, who quoted a spokesman as saying “the CBRC wants to restrict bank’s mutual holding of each others’ bonds as this does not reinforce the bank’s capital capabilities.” The move comes amidst other signs that Beijing is reigning in loans provided by banks.

The government has acknowledged that up to 20 percent of all new loans in this year have been spent on property and stock speculation which helped the Shanghai stock market jump 90 percent in the past seven months. Banking regulator Liu Mingkang has stated that banks must ensure loans they have issued for investment projects are in fact put to use in the real economy.

This latest move indicates that supervision on loans made by banks is being stepped up. Subordinated bonds have previously been included as part of banks’ tier two capital and are considered part of the capital adequacy ratio requirements for banks, which China set at 8 percent. If implemented, banks will not be able to use these instruments as part of their capital base.

Banks have thus far issued RMB200 billion in such bonds this year, double the entire amount for 2008, with some lending each other these instruments in order to help them meet their capital adequacy ratios. Some estimates suggest up to 50 percent of capital adequacy in some Chinese banks is made up of subordinated bonds.