BEIJING/SHANGHAI: Some foreign banks in China are forced by the latest Chinese regulations to significantly reduce the amount of lucrative foreign currency-denominated loans that they grant to domestic clients, foreign banking sources told Reuters.

"We're busy seeking clarification from the forex regulator to see if a grace period or any waiver can be given," said a senior European banker in Shanghai, declining to be named as the person was not authorised to speak to the media.

"Issuing loans in foreign currencies is our key business to keep our mainland unit afloat. We're under pressure if the size is cut."

The People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) effectively lowered the upper limit on the amount of cross-border financing that domestic corporates can obtain last month by cutting the so-called macro-prudential adjustment parameter to 1 from 1.25.

As Chinese borrowers convert their foreign currency loans into yuan, analysts say the Jan 7 move, which reversed steps taken in March to ease financing in the pandemic-stricken economy, should help slow the appreciation of a Chinese currency that gained nearly 7% against the dollar last year, and by more than 1.5% last month.

Neither the PBOC or SAFE immediately responded to Reuters requests for comment.

So far, most Chinese and foreign banks in China are seeing limited impact on their business as a result of last month's change, sources said. And, they added, financial market liquidity remains stable due to the wide range of loan products offered by banks.

But some foreign banks are way over the limit, holding foreign loans in their books multiple times higher than the requirement, three foreign bankers said.

"Domestic banks might not be sensitive to this move due to their size and scope, but there is definitely turmoil happening in the small corner of foreign banks, which are already facing tough times in the mainland market," said another foreign banker, who declined to be named.

Some foreign banks could have to significantly reduce their loan portfolios, losing profits, other sources said.

Foreign banks have a combined market share in China's banking sector of about 2%.

The smaller ones could face the prospect of having to change their business model drastically, as granting foreign loans with cheap funds overseas has been one of their most lucrative onshore businesses.

Some have made requests to PBOC and SAFE for a one-year grace period to adapt to the change, according to sources, one of whom noted that the new guidance could hit their onshore presence, which would be unhelpful to China's goal of opening up its financial sector.