Government intervention is the price of doing business on the mainland, but the extent of the intrusion can still be shocking. Here is an account by a Shanghai-based banker of the ordeal the industry has gone through in the past four months. Wind the clock back to January. Beijing had already been taking measures to cool the economy. But nobody seemed to be listening. The economy continued to grow robustly. In just the first two weeks of January, banks - both domestic and foreign - had already lent 110 to 115 per cent of what they had lent for all of 2010. This, despite the fact that the 2011 loan quota had yet to be announced. Quotas are there to be exceeded, as any veteran mainland banker will tell you. Not that the quotas can be ignored. But as long as you can make the numbers fit by the end of the year - by refusing loan draw-downs or other means - regulators will leave you in peace for most of the year. So when the central bank and the bank regulator summoned senior bankers to closed-door meetings in the third week of January, they were expecting the normal ritual - the handing-down of the annual loan quota, plus some rhetoric about the need for monetary tightening. But they were wrong. Now there no longer would be an annual quota but a monthly one, said the officials. That meant they did not have 12 months to play with their numbers but were given an immediate order to trim their loan books. 'Say I had lent out 80 yuan in 2010 and 90 yuan in the first two weeks of January,' said the banker. 'But now, with the January quota set at 82 yuan, I have to cut my loan book by eight yuan within days. Multiply these numbers by a billion, and you see why every face was ashen.' A daily monitoring system was also imposed. Banks now have to file a daily report on their loans outstanding and on various lending ratios. The daily numbers will be fed to the central government and checked against official ceilings and benchmarks. What if the banks don't comply? An 'unco-operative' bank must deposit more reserves with the central bank, meaning less money to lend and less profit, said the officials. That is serious medicine. The central bank has already raised the reserve ratio to a historical high and there are more increases to come. Getting hit with an extra reserve requirement is the last thing any bank wants. There was silence at the closed-door meetings. 'It's pointless to argue or question,' said the banker. Before anyone could leave, an official was quick to remind everyone about strict confidentiality. Translation: don't ever tell your clients that the central bank has forced you to cut their loan. In the days after those with clout pleaded for lenience, said the banker. 'Say, how about an immediate cut to 85 yuan instead of 82 yuan in return for zero loan growth for the three months?' In addition to cutting back the loan book, banks faced daily financial ratios they had to meet. 'Those without clout scrambled for funds,' said the banker. Where to go for funds? First, the interbank market. The hunger for funds pushed the 24-hour rate up to 5.7 per cent from 2.63 per cent in one day on January 20. The weekly rate jumped to 6.07 per cent from 4.06 per cent. Second, go to the client. One would have expected a fierce argument from clients if you cut their credit lines especially when a customer had not breached any of the terms. But on the mainland, it's different. 'When you tell the customers we have to be supportive of state policy, their only question is when and how much [to cut],' he said. After all, we are talking about a place where domestic banks can refuse to let you take your deposit out until the regulators are done with their year-end check. 'The banks have no choice. Neither do we,' said a corporate finance manager. The real killer, however, has been the daily thresholds and the reporting requirements. Bankers, except mainland veterans, are trained to think and plan monthly if not yearly. Foreign banks differentiate themselves from domestic lenders by providing long-term loans, rather than the typical loan with a maturity of one year or less. But now things operate on a daily basis. Every morning each manager will generate an activity list of his or her clients, detailing who is going to withdraw money from their credit line today and how much; who is going to repay today and how much; and whose loan needs to be rolled over today and how much. The lists are put together to figure out how much money is available for lending and how big the loan demand is. Senior bankers will then decide which customers get what, without exceeding the threshold. It would have been somewhat easier if the bankers were free to make the business decisions. But they were not. The central bank warned bankers not to 'penalise' small businesses when it came to trimming their loan books. Remember, state leaders have pledged to support small business for the jobs they create. So, every day bankers have to make sure clients - of the right size and mix - get the loans. There is no room to manoeuvre. The daily report also includes customers who are turned away. 'We are not doing this in just one or two branches but countrywide,' said the banker. 'Mind-boggling is an understatement.' The result? More than 40 small banks were punished with a higher reserve ratio by the central bank, according to state media. The non-bank interest rate rose from 15 to 20 per cent to a range of 18 to 24 per cent. Lending by small firms - which were subject to less restraint - grew by 100.3 per cent to 240.8 billion yuan in the first three months, dwarfing the 33.4 per cent annual growth last year. Total new yuan loans dropped from one trillion yuan in January to 730 billion yuan in April. For the first four months, the loan tally was 2.97 trillion yuan, which is 11.9 per cent below the same period last year. 'The figures show that our loan management has yielded good results,' said a People's Bank of China spokesman. Yes, the kitchen is messy and ugly. But in a country where all pricing is distorted, bankers measure risk not by financial ratios but by state policy. Draconian administrative measures are always a quick fix.