The move to stamp out the practice of siphoning off bank loans
for stock market speculation is set to have a positive impact in
the long run and help financial stability, say analysts.
Liu Mingkang, chairman of the China Banking Regulatory
Commission, said his agency had evidence of "relatively serious"
misuse of bank loans for stock market speculation and would crack
down on such irregularities.
Liu said this on the sidelines of the annual session of the
National People's Congress, confirming a long-circulated market
rumor.
The regulator issued a directive in January, reminding banks and
financial institutions of the hazards of their association with
securities brokerages and ordering them to investigate the problem
of misuse of banks loans.
China's stock market, which reversed its five-year slump and
gained more than 130 percent last year, is still going strong this
year. The climbing index has lured a growing number of investors
into the market.
A record 700,000 new stock and fund accounts were opened in the
first week after the week-long Lunar New Year festival break,
according to figures from the China Securities Depository and
Clearing Corporation Limited.
The total number of stock accounts had reached an all-time high
of 83.57 million by March 2, it said.
But at the same time, many individuals and institutions have
turned to bank loans to invest in the stock market.
"The number of consumer credit and other credit with no specific
stated purpose has increased dramatically and we are scrutinizing
the problem," said Fan Wenzhong, deputy director of CBRC's Research
Bureau.
Although specific figures are not available, many analysts and
market watchers say consumer credit and housing mortgages are easy
prey that are often misused in the stock market.
The banking regulator believes 90 percent of personal credit
extended by banks is being channeled illegally into the stock
market, Reuters quoted an unidentified CBRC official as saying.
"CBRC has made it clear that it will investigate the problem of
misuse of bank loans for stock market speculation and prevent the
risks in the capital market from transferring to banks," Fan said
recently at a financial forum in Beijing.
The regulator's determination to stop the irregularities in bank
loans, analysts say, will help the market develop in a stable and
healthy way a necessary step to pre-empt a huge financial risk.
"It (the move) may exert a downward pressure on the market in
the wake of last week's sharp fall as it will force some of the
funds out," said Zhao Xinke, a professor with Shanghai-based China
Europe International Business School.
"But it is a necessary step for the sake of the long-term health
of the market and financial stability," Zhao said.
The Shanghai Composite Index tumbled 5.6 percent last week. It
plummeted 8.8 percent last Tuesday, the steepest drop in a
decade.
But most analysts now say the massive fluctuation was mostly a
technical correction of previous gains, and not a turning point for
the boom period.
"Speculative funds are always seeking short-term profits and
this will only add to market volatility," said Han Meng, an
economist with the China Academy of Social Sciences.
"More seriously, the inflow of bank loans into the stock market
will brew huge potential risks for both banks and the borrowers
themselves," the economist said.
"As those misused loans are usually short term, once the market
tumbles, it may lead to a financial meltdown."
(China Daily March 14, 2007)