by Allison Jackson

BEIJING - Chinese banks may need to raise billions of dollars in the next few years as massive lending erodes their capital and leaves them vulnerable to bad debts, a pair of research reports has warned.

Listed banks may have to raise more than 300 billion yuan (S$61 billion) as they come under growing pressure from regulators to beef up their balance sheets, the separate reports by BNP Paribas and Citigroup said.

The warnings come as the China Banking Regulatory Commission (CBRC) this week said it would impose curbs on banks that fail to shore up their defences against bad loans as Beijing tries to put the brakes on record lending.

"With expected fast loan growth and balance sheet expansion in 2009 and 2010, banks will likely need to raise new capital to meet the regulator's higher capital adequacy ratio standards," Dorris Chen, a Shanghai-based analyst at BNP Paribas, wrote in her report.

Chen said 11 banks listed in Shanghai and Hong Kong might need to raise 326 billion yuan, putting pressure on equity markets.

"Potential equity or hybrid debt raising could impose a sector overhang in 2010 and 2011 in our view," Chen said.

China has set the capital adequacy ratio - capital as a percentage of its risk-weighted credit exposure - at a minimum of eight per cent.

But the banking regulator has been guiding banks to increase their ratio to 10 per cent, Chen added.

Meanwhile, Citigroup analyst Simon Ho said in a research report that smaller banks listed in Shanghai may need to find up to 113 billion yuan by 2011 on top of already announced plans to raise a total of 53 billion yuan.

"None of the (Hong Kong-listed) banks presently need new equity but there may be such a need in the next two to three years," Ho added.

Most Chinese listed banks had capital adequacy ratios above 10 per cent at the end of September, Ho said. Minsheng Bank and Shenzhen Development Bank had ratios of 8.5 per cent and 8.6 per cent respectively.

China Construction Bank, Bank of Communications, and Industrial and Commercial Bank of China told AFP they had no immediate plans to raise capital.

Bank of China was not immediately available to comment but it is reportedly considering various options to replenish capital.

In its warning to banks, the CBRC said in a statement on its website Monday that those that fail to reduce credit risk will face "restrictions on market access, overseas investment, and outlets and business expansion."

The prospect of the regulator putting teeth in its directives sent the benchmark Shanghai Composite Index down by 3.5 per cent at its close Tuesday, the biggest single-day fall in nearly three months.

Chinese banks lent a record amount this year following government calls to boost the economy in the face of the global financial meltdown.

New bank loans reached 7.4 trillion yuan in the first half of the year, as banks heeded government calls to pump money into the world's third largest economy to fight off the global slump.

The pace slowed after regulators told banks to rein in lending and step up risk management, while seasonal factors also played a role, economists said.