ANALYSIS - China banks' rush for billions could trip markets

By Samuel Shen and Doug Young

SHANGHAI/HONG KONG (Reuters) - Chinese banks, under government pressure to shore up their finances, are set to unleash a wave of billions of dollars in capital raising that could strain equity markets but also spur innovation in debt instruments.

The banks could go to the market with a slew of new stock and bond offers as they look to raise as much as 300 billion yuan ($44 billion) over the next few years, according to some estimates.

The move would follow a surge in bank lending in the first half of this year, encouraged by the central government under its broader 4 trillion yuan economic stimulus plan. But now the regulator, worried about a lending bubble, is cautioning banks to ensure their capital is adequate.

Three of the country's top four listed banks, Bank of China Ltd, China Construction Bank and Bank of Communications have already started work on fundraising proposals, a source told Reuters on Monday.

"There's no doubt there will be a massive wave of fund raising from Chinese banks, but the key question is when, where and how," said Fan Kunxiang, analyst at Haitong Securities Co. "If banks all rush to sell shares within a short period, it would unavoidably be a blow to the stock market."

The Chinese lenders aren't the only ones in Asia looking to raise capital. Japan's banks, for instance, could be raising tens of billions of dollars to meet stricter capital rules. Mitsubishi UFJ Financial Group, Japan's top bank, said last week it would raise $11 billion to meet coming regulations.

In the latest wake-up call to lenders, China's top banking regulator Liu Mingkang warned in an article published on Tuesday that banks need to protect themselves from credit risk caused by changes in the country's industrial structure.

Analysts said small- and medium-sized lenders could be the first to feel the pinch, lacking the resources of larger lenders.