[SHANGHAI] China's banking regulator has told lenders in Shanghai to increase their scrutiny of loans for mergers and acquisitions (M&As) to ensure the funds aren't used to buy land, according to people familiar with the matter.

A significant portion of M&A loans in Shanghai have been used for deals involving land as the main underlying asset, the China Banking Regulatory Commission's (CBRC) Shanghai branch said in a notice issued in recent days, according to the people, who asked not to be identified as they're not authorised to speak publicly. The regulator requested banks to strictly comply with current policies on M&A loans and other real estate lending policies.

The directive marks the latest move in China's crackdown on risks in the US$38 trillion banking industry and its campaign to reduce the flow of money into riskier areas such as real estate. The authorities stepped up restrictions on lenders' entrusted loans business in January, plugging a loophole in shadow financing to the property sector, after last year tightening the sources of home loans.

CBRC's Shanghai branch reiterated that banks aren't allowed to provide M&A loans for the purchase of companies whose only assets are land holdings, the people said. In addition, banks are prohibited from providing loans in any form to land projects where permission to start construction hasn't been received, or where land-acquisition fees haven't been fully paid, the people added.

The regulator also urged banks to boost merger and acquisition loans to strategically-important sectors, as well as for overseas acquisitions involving key technology and intellectual property, according to the people.

Earlier this week, regulators required Hengfeng Bank, a regional Chinese lender, to temporarily halt new real estate lending.

Chinese developers spent a record 646 billion yuan (S$134.6 billion) last year buying competitors or their assets, according to data compiled by Bloomberg, as land prices surged.

BLOOMBERG