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)