Chinese bank deposits have dropped following a crackdown on lenders manipulating their numbers and "illicit" means of attracting money, which is threatening to weigh on credit growth and hinder efforts to reignite the economy.

Four of the five biggest banks, led by the Industrial & Commercial Bank of China Ltd, posted a drop in deposits as they reported third-quarter earnings this week.

Central bank data showed it was the first quarterly decline for the nation's banking industry since at least 1999.

The lower deposit levels are likely to curtail credit as banks are prohibited from lending more than 75 percent of their quarter-end holdings, while a sustained drop could hamper government efforts to rejuvenate an economy forecast to expand this year at the weakest pace since 1990.

The lenders may also come under pressure to tap more expensive financing.

"With banks now less able to window-dress their deposit figures, some will be forced to scale back lending to meet loan-to-deposit requirements," said Julian Evans-Pritchard, a Singapore-based China economist for Capital Economics Ltd.

"Regulatory controls are getting harder for banks and that's weighing on credit growth."

ICBC, the world's largest lender by assets, posted the biggest decline in funds during the third quarter, with its deposits dropping by 388 billion yuan ($63 billion) from June to 15.3 trillion yuan. Bank of China Ltd, Agricultural Bank of China Ltd and Bank of Communications Co also reported declines. Only China Construction Bank Corp, the nation's second-largest, had an increase.

As the country's housing-market slump continues to drag on growth, bad loans are piling up.

Beijing-based ICBC reported its biggest jump in soured credit since at least 2006 in the third quarter. Smaller rival Bank of China more than doubled its provisions for bad loans, while the combined profit growth of the five biggest banks slowed to 6 percent from 10 percent a year earlier.

Banking shares rallied on Friday, led by Bank of Nanjing Co and Bank of Ningbo Co, amid speculation that concerns about the outlook for lenders were overstated.

Leading banks may gain more than 30 percent as their share prices imply a nonperforming loan level of 10 percent, China International Capital Corp analyst Huang Jie wrote in a note. That compares with the industry average of 1.08 percent as of June 30.

In September, the China Banking Regulatory Commission introduced rules to curb volatility in deposits and eliminate the use of what it termed as "illicit" means such as kickbacks and higher-than-regulation interest rates to attract money.

Previously, lenders reported surging deposits at the end of each quarter, with a slump typically in the next month.

The new rules could lead to a gradual weakening of deposit and loan growth for the next few months, said May Yan, a Hong Kong-based analyst at Barclays Plc, earlier this month.

Industrywide data show it is unusual for yuan-denominated deposits to decline on a quarterly basis. A 950 billion yuan fall in the third quarter to 112.7 trillion yuan was the first since at least 1999, according to data from the People's Bank of China.

"The costs of funds would rise because banks might have to resort to other, costlier channels," said Castor Pang, head of research at Core-Pacific Yamaichi in Hong Kong.

"Rising costs of funds are bad for the economy because they hurt investment sentiment, as companies become less willing to borrow."

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