Regulator is expected to focus finance on railway and infrastructure projects

China is continuing to loosen the regulatory reins on bank lending as the economy struggles amid rising global uncertainties, especially the European debt turbulence.

An official at the China Banking Regulatory Commission told China Daily on Wednesday that the agency is preparing to relax regulations on bank lending to local government financial vehicles and the property sector, two areas that the CBRC has repeatedly termed very "risky" since 2010.

"It is a natural decision for the CBRC, as 'stabilizing economic growth' has become the government's top priority," said the official, speaking anonymously.

The CBRC will encourage banks to lend to rail and road projects and probably will accept a higher proportion of loans to such projects, according to a 21st Century Business Herald report on Wednesday.

Banks will also be allowed to lend more for low-cost and small apartments and resume lending to some qualified programs of local governments' financing vehicles, if earlier loans are repaid.

The proposed measures are awaiting final approval from the State Council, China's cabinet, the newspaper reported.

Last year, CBRC officials highlighted major sources of risk arising from the 2009 lending surge, which was intended to counter weakening export demand.

These areas included government-backed loans to businesses (loans through local government financing vehicles and loans to railway, road and other infrastructure construction projects), property loans and medium- and long-term lending.

At the start of this year, CBRC Chairman Shang Fulin vowed to "firmly hold the bottom line of no systemic and regional risks", saying the regulator's task will be more difficult as the banking environment gets more complex.

"A new round of stimulus measures and sacrifice of strict banking regulation would bring accumulated risks for the middle and long run," said Yvonne Zhang, vice-president and senior analyst at Moody's Investors Service (Beijing) Ltd.

The credit easing comes as growth in the world's second-largest economy slows, having declined to 8.1 percent in the first quarter, the weakest pace in nearly three years.

New yuan lending has repeatedly fallen short of expectations since the year started, and the economic data have dimmed.

These factors sparked concerns the government would step up pressure on banks to lend more to construction projects and the property sector.

"It will be difficult to see a significant turnaround in economic growth absent of a rebound in credit," said Charlene Chu, head of Chinese banks' ratings at Fitch Ratings.

Fitch said that 2012 is shaping up to be the first year since 2008 in which net new credit falls below the previous year.

Seeing the downside risks, the government has been making efforts to bolster growth, which included cuts in interest rates and bank reserve requirements and delays in tightening lenders' capital requirements.

Last week, the central bank announced a cut in interest rates by 25 basis points, the first reduction since the end of 2008.

Regulators also announced earlier this month that they would postpone implementation of tougher capital adequacy regulatory rules for commercial banks for a second time, to the beginning of 2013, to ease capital problems among lenders and facilitate lending.

New lending in May exceeded market expectations, unlike in previous months, and money supply growth accelerated. New yuan loans stood at 793.2 billion yuan ($125 billion), up from 681.8 billion yuan in April.

M2, a broad measure of money supply that covers cash in circulation and all deposits, grew 13.2 percent last month from a year earlier, compared with a 12.8-percent increase in April.

JPMorgan Chase & Co lowered China's full-year GDP growth forecast to 7.7 percent from the previous 8 percent.

The State Council warned on May 23 that downside risks are rising and pledged to make stabilizing economic growth the top priority.

It has launched new stimulus measures, such as speeding up approval of rail and other infrastructure projects, discounting loan rates to first-time home buyers and introducing incentives to encourage sales of energy-efficient home appliances.