China's central bank will not loosen control over loan extension despite complaints from local businesses about cash flow problems, according to Governor Zhou Xiaochuan of the People's Bank of China.

"We will not slacken restrictions on loan extension, though commercial banks have reported a slightly smaller number of non-performing loans," Zhou said at the China International Conference in Finance 2004 held in the eastern commercial hub Shanghai.

The three-day meeting is sponsored by the Chinese finance studies institute of the Beijing-based Qinghua University, Sloan School of Business of the US Massachusetts Institute of Technology, and the Shanghai-based China-Europe International Business School.

Zhou said although many small and medium-sized businesses complain of difficulties in getting bank loans for operating funds, loans granted by commercial banks for that purpose already accounted for 70 percent of the country's gross domestic product.

"Compared with many other countries, the ratio of our bank loans for enterprises' operating funds is quite high, even in the rural areas -- still a fledgling market for bank lending services," he added.

Chinese companies, including the best-performing ones, should not underestimate loan risks, nor should they take it for granted that banks would provide them with circulating funds only because their products sell well, Zhou warned. "Such belief is probably the last legacy left by the former planned economy," he added.

According to the central bank governor, only 17.22 percent of all the new short-term circulating fund loans extended in 2003 went to state-owned enterprises (SOE).

By the end of 2003, loans extended to SOEs as short-term operating funds accounted for 35.72 percent of incremented bank loans. The figure dropped to 34.11 percent by the first quarter this year.

"The percentage is quite close to the SOEs' 30 percent contribution to the country's gross domestic product," said Zhou.

The People's Bank of China said in a recent report that banks doled out a combined 113.2 billion yuan (13.6 billion US dollars) in Renminbi-denominated loans in May this year, less than half of the figure for a year earlier.

This was largely attributed to the decrease of short-term loans-- which should be serviced in less than one year -- and bill business, while loans of longer terms maintained high growth, said Deputy Governor Sheng Songcheng of the central bank's Shanghai branch, pointing out that enterprises would thus lack funds in hand for daily operation.

In response to the country's macro-economic adjustments, commercial banks have been ordered to pull back on loans extending to overheated sectors including iron and steel, aluminum, cement, real estate and automobile which are largely backed by bank lending.

The central bank had ordered commercial banks to set aside more deposits as reserves in the central bank three times in a row since last September, freezing hundreds of billions of yuan that could otherwise be used for lending.

New yuan loans should be confined to 2.6 trillion yuan (313.3 billion dollars) this year, according to the central bank.