China imposes new rules on policy banks as concerns about debt crisis risks grow

China has set new rules to curb risks at its policy banks, stepping up oversight of the country’s financial system as Beijing looks to avert a debt crisis in the world’s number two economy.

For the first time, the China Banking Regulatory Commission (CBRC) will impose specific rules designed in part to reduce financial risk at three banks tasked with funding Beijing’s pet projects and supporting Chinese companies abroad.

The rules, released on Wednesday, include setting up mechanisms to make sure they do not lend more cash than they can afford as well as corporate governance provisions.

The new rules come as Beijing copes with ballooning debt that some analysts say threatens the stability of the Chinese economy.

The three banks – China Development Bank, Export-Import Bank of China and the Agricultural Development Bank of China – had 25 trillion yuan ($3.8 trillion) in assets at the end of September, according to state news agency Xinhua.

That makes them roughly as large as the country’s biggest state-owned bank, the Industrial and Commercial Bank of China.

The special regulations will “strengthen risk control” and ensure the policy banks’ “safe and stable” operations, an unnamed CBRC spokesman said on the commission’s website, noting the lenders had consulted commercial banking regulations since their establishment in 1994.

The policy banks figure prominently in President Xi Jinping’s signature Belt and Road Initiative that China says will invest US$1 trillion in Asian and European countries to revive ancient trade routes with a massive network of rail and maritime links.

Some of the projects have faced headwinds and critics say the initiative is weighing down some countries with debt they will struggle to repay.

The policy banks had directed 1.42 trillion yuan of lending to Belt and Road projects as of September, according to Xinhua.

China’s leadership is struggling with a vast debt mountain that has seen Moody’s and Standard & Poor’s downgrade their sovereign ratings for the country

Debt-fuelled investment has underpinned the economy’s rapid growth, but there are widespread concerns that years of freewheeling credit could lead to a financial crisis with global implications.