Roughly three trillion yuan (HK$3.63 trillion) of bank loans on the mainland have been channelled into underground lending in the eastern provinces of Jiangsu and Zhejiang, Securities Times reported yesterday. Companies obtained bank loans and lent the money on at higher rates through third-party companies - including financing firms - to capital-starved small and medium-sized companies, said Liu Mingkang, chairman of the China Banking Regulatory Commission, at a recent closed-door conference with lenders, according to the Shenzhen-based state-run newspaper. The paper did not say how long this has been going on. The booming underground loan market reflects unbalanced supply and demand of capital and inefficient use of funds. The central bank tightened money supply and introduced lending curbs to rein in inflation this year. Big companies, usually owned by the central government or local governments, are traditionally favoured by banks and have access to loans at an interest rate of 7.2 per cent. That is a 10 per cent premium to the one-year benchmark interest rate of 6.56 per cent, according to the newspaper. The companies on-lend the loan proceeds to third-party firms, and the money ends up with small and- medium-sized companies, which borrow at an annualised interest rate of between 36 per cent and 60 per cent, the paper said. Speaking to a group of bankers last month, Liu said banks should be 'highly alert' to their exposure to risk from online lending, grey-market lending and loans to microcredit companies and should take measures to avoid them, according to a published memo on the commission's website. 'There are widespread accounts of smaller businesses struggling to gain access to credit and increasingly turning to non-bank channels to meet their borrowing needs,' said Jing Ulrich, JPMorgan's chairwoman of global markets for China. '[The] mainland's more efficient private sector is facing higher borrowing costs while contending with faster wage growth and elevated input costs.' Beijing's 4 trillion yuan stimulus package following the global financial crisis channelled massive amounts of money to government-related companies to build roads, railways, airports and infrastructure. Some have turned out to be white elephants. Analysts say substantial amounts of loans to local government and their financing vehicles may become bad debts over the next few years because of debtors' inadequate cash flows.