China has instructed banks to recalculate capital levels by the end of March, taking account of higher risk ratings on loans made to local governments, Bloomberg reported. The banks have lent at least US$1.2 trillion to local government financing vehicles. If the banks assign risk weightings as much as triple the existing ones for loans to financing vehicles that are not fully backed by cash flow, it could cut capital ratios at China’s five largest banks to near the regulatory minimum level, the report quoted two people with knowledge of the matter as saying. “If the actual impact on banks’ capital adequacy levels turns out to be alarming, I don’t think the CBRC (China Banking Regulatory Commission) will be able to implement it as planned,” said Li Shanshan, an analyst at Beijing-based BoCom International. “The last thing the market wants now is another round of capital-raising by banks.” Restrictions on lending to local government are part of a wider plan to keep inflation and property prices in check and slow credit expansion.