The central bank on Friday said that banks should stop lending to projects that cause heavy pollution and waste energy.

It also urged commercial banks to establish a long-term mechanism that uses lending to support technological innovation in energy saving and emission reduction, according to a People's Bank of China guideline published on its website.

Meanwhile, it said banks should offer more help to companies in the energy-saving and environmental protection sectors.

According to the guideline, banks should call in existing loans for projects in the "forbidden" category of industries designated by the State and extend no new credit to those in the "limited" category.

For existing projects in this category, banks can continue to lend if it is "necessary" and if the State allows those projects to undergo technological upgrading to meet environmental standards.

To encourage enterprises to cut pollution and meet environmental standards, the State has divided industries into different categories and has different industrial policies toward them.

To implement the financial policy, the central bank urged its local branches to strengthen "window guidance," or moral suasion, and remind banks of lending risks to difference industries.

The central bank also urged its local branches to help improve the national corporate credit system and include thorough information on enterprises' environmental records in the system.

The new guideline is a move to "properly control lending, optimize the structure of loans and strengthen lending risk management", the central bank said.

"Banks can be an important lever in enforcing environmental standards," said Bert Hofman, World Bank Lead Economist for China. "And China has some way to go in this respect," he told China Daily.

The central bank said it will work with the State Environmental Protection Administration to launch further environmentally friendly policies, but did not elaborate.

(China Daily July 7, 2007)