Bareksa.com - Chinese regulators have imposed measures to stop banks from collecting large amounts of deposits at the end of a month to flatter their financial position, a practice that traders have said threatens the stability of China's financial system and markets.

Deposits at banks at the end of any given month must not exceed 3 percent of the average daily level during that month, the China Banking Regulatory Commission (CBRC) said in a notice published in its website, www.cbrc.gov.cn, at the weekend.

The notice was jointly issued with the central bank and the finance ministry.

It also banned banks from using interest rates exceeding regulatory limits to attract deposits or using wealth management products to indirectly boost their savings as the end of month approaches.

Lenders that violate these and other new requirements will have part of their business suspended while serious violators will have their ratings downgraded, the regulators said.

The new policy "is aimed at improving the appraisal mechanisms for banks, and at effectively preventing and controlling risk," the regulators said in the notice, posted at the weekend.

The deposit level at Chinese banks has a bearing on the bank's rating by regulators. Other requirements, such as a 75 percent loan-to-deposit ratio, have also encouraged banks to bolster their deposits at the end of a period, they said.

These practices have caused sharp fluctuations in Chinese market interest rates and distorted China's credit data, causing instabilty in the markets and worries over the health of the economy, analysts have said.

The weighted average rate for China's benchmark seven-day bond repurchase agreement tends to rise sharply at the end of month and surge at the end of each quarter.

Surges in end-of-quarter bank deposits have also boosted new loans extended by banks in the last month of a quarter, and then dropped sharply the month after, leaving the impression in certain months that economic growth was slowing sharply.

In the latest example, Chinese banks posted a sharply-lower-than-expected 385.2 billion yuan ($62.8 billion) worth of new yuan loans in July after a surprisingly high 1.08 trillion yuan in June, causing fresh jitters about a further slowdown of the world's second-largest economy.

Traders have said that the data has been partly distorted by the end-month rush to meet regulatory requirements, including the deposit and loan-to-deposit indicators. ($1=6.1346 Yuan)