Beijing takes hard line on illegal fund channelling
Guo Aibing in Beijing and Tim LeeMaster
In a sign of Beijing's further clampdown on speculation in stocks and properties, the foreign exchange authority said it had punished lenders for illegally channelling overseas funds into the markets and would launch an industry audit soon to ensure its regulations are followed.
The State Administration of Foreign Exchange (SAFE) said yesterday 19 mainland banks and 10 foreign banks had been penalised for the violation. It did not disclose the names or punishments.
SAFE's move came as the China Banking Regulatory Commission publicly reprimanded eight domestic banks for improperly channelling money into domestic and property markets on May 18.
People's Bank of China governor Zhou Xiaochuan said at the weekend that shares listed in the mainland might be overvalued and further interest rate increases were possible.
Citing research by local brokerage Shenyin Wangguo, the China Securities Journal reported yesterday that about 61 per cent of the drop in bank deposits from May last year to April this year went into the stock market, contributing to the bullish market in the past few months.
The property market has also been rising despite the government's efforts to curb growth.
Wang Shi, the chairman of the mainland's biggest listed developer, China Vanke, has warned that the market was reaching a bubble that could soon burst.
According to a finance sector source, private equity and hedge funds have been avoiding mainland capital controls on stock investment by using global banks to funnel money into the country.
The source said a fund could deposit money into an offshore bank account on the unwritten understanding that it could borrow a similar amount in yuan from the same lender's mainland operations.
Another source said illegal capital also entered the mainland through shell companies.
'There's a lot of overseas Chinese and Taiwanese money coming in through a lot of different channels. The most prevalent method is to form a shell export company and bring in cash that way with false bills of lading, or receipt of goods. There's a big business in that going on in Guangdong,' the source said.
SAFE administrator Hu Xiaolian had previously told domestic and overseas bankers the country would increase its supervision of short-term foreign debts and bank loans to ensure the country's stock and property markets would not be affected by international 'hot money'.
Ms Hu asked banks to actively abide by the country's foreign currency rules and restrain from deliberately taking advantage of loose supervision in the sector to secure foreign debts. She said SAFE would conduct an industrywide audit in the near future to detect whether banks were strictly following the administration's foreign currency policies.
Zhuang Jian, a senior economist with Asian Development Bank, said the illegal entry of foreign capital could undermine the country's long-term financial stability if not closely monitored.
'International hot money usually enters a market fast and sometimes leaves it even faster. That capital is not the money a country can count on to develop its economy,' Mr Zhuang said.
He said the overflow of short-term foreign capital, which was believed to be a key factor causing the Asian financial crisis in 1997, was something the mainland's central bank tried to avoid.