China's banking regulator barred finance companies from offering customers loans to trade foreign exchange, saying 90 percent of the investors have lost money in a service that resembles "gambling."

"The ability of banks' clients to fully identify risks in this service and the banks' risk control capabilities are still inadequate," China Banking Regulatory Commission said in a statement on its Website yesterday. Banks failed to select qualified clients, "blindly" granted larger loans and lowered entry criteria to compete for business, it said.

Bank of Communications Ltd, partly owned by HSBC Holdings Plc, was the first to offer margin trading in currencies starting in 2006. Transactions were typically more than 20 times the amount put down by investors as a deposit, and mounted to as much as 50 times in some cases, the statement said.

"I hope the restriction would be temporary and the banks can start this business again after improving internal risk-controls," said Guo Zhaoyang, a foreign-exchange strategist at China Everbright Bank Co in Guangzhou, Guangdong Province. "It's a very profitable business for banks."

Foreign-exchange margin trading is expanding across Asia. Trading of currencies in Japan using borrowed funds rose 86 percent in the first quarter to 213 trillion yen (US$1.97 trillion), figures from the Financial Futures Association of Japan showed on May 16.

The regulator said "only a very small number of banks have been offering the service in some cities on a trial basis, and the number of investors is limited."

The banking regulator will study risk supervision of the service and enact new rules when "all conditions are ripe," the statement said. Contracts signed before the ban remain valid, it said. Investors should aim for an "early" settlement of their transactions, and banks must stop offering new deals.

The regulator issued an order curbing the service after oral warnings failed and banks continued to offer the service.

(Shanghai Daily June 13, 2008)