BEIJING:CHINA'S BANKS are in good shape to ride out the global financial crisis and have provided a crucial boost to the domestic economy through a surge in lending, the banking regulator has said.

Liu Mingkang (pictured right), chairman of the China Banking Regulatory Commission, mixed his confident overview of the country's banking sector with a pledge that the government would act firmly to prevent a rise in bad debt.

That vigilance will include scrutiny of new loans by Chinese banks, with tighter regulation of their overseas investments, a source briefed on the plans said.

China's banks provided 1.6 trillion yuan (€183 billion) in new loans in January, a monthly record, after strong loan growth in the last two months of 2008.

Some analysts have expressed concern that the rush of lending could swell bad debts on banks' books, but Liu Mingkang said the ample credit would give a lift to the economy and was nothing to be worried about.

"Our general analysis and investigations have proven that the fundamentals are normal," he told a news conference in Beijing. He struck an upbeat note on the health of Chinese banks at a time when many of their international counterparts have seen balance sheets battered by plummeting asset values and have turned to investors and governments for capital injections.

"Generally speaking, this financial crisis has limited impact on the Chinese banking system, and the risks along with it are under control," Liu said in a statement.

The amount of bad debt on Chinese banks' books fell sharply in 2008, with the sector's overall non-performing loan (NPL) ratio dropping to 2.45 per cent, down 3.71 percentage points on the year.

Analysts had said that the fall was mainly caused by the write-off of 800 billion yuan in sour loans at the Agricultural Bank of China, the last state bank to receive a government bailout.

Liu effectively confirmed this, saying the NPL ratio dropped only 0.84 percentage points when stripping out the effects of the AgBank reform along with special measures to ease financing in the areas of southwest China hit by an earthquake last May.

He said AgBank will decide for itself on purely commercial grounds whether to sell a stake to a strategic partner before its possible stock market listing.

Foreign investors were given strategic stakes in China's other major state-owned banks before their public listings, but the weakness of foreign banks now has fuelled speculation that AgBank might forego such a partnership or only invite aboard a domestic peer.